Working Paper: NBER ID: w13200
Authors: Marco Bassetto; Vadym Lepetyuk
Abstract: We consider the effect of excluding government investment from the deficit subject to the limits of the European Stability and Growth Pact. In the model we consider, residents of a given country discount future costs and benefits of government spending more than efficiency would dictate, because they fail to take into account the portion that will accrue to people that have not yet been born or immigrated into the country. It is thus in principle desirable to design budget rules that favor long-term investment (by allowing more borrowing) over other government spending that only carries short-term benefits. However, given the low rates of population growth, mortality, and mobility across European countries, we find that the distortions arising from treating all government spending equally are likely to be modest. We also show that these modest distortions can be alleviated only if net government investment is excluded from the deficit computation; excluding gross investment may even be counterproductive, as it promotes overspending in government capital.
Keywords: government investment; European Stability and Growth Pact; fiscal policy; public investment; intergenerational equity
JEL Codes: D61; E62; H41; H54; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Demographic factors (population growth, mortality, and mobility) (J11) | Underinvestment in public goods (H40) |
| Excluding net government investment from the deficit computation (H62) | Alleviate distortions in government spending decisions (H19) |
| Excluding gross investment from the deficit computation (H62) | Overspending in government capital (H54) |
| Treatment of public investment (H54) | Efficiency of fiscal policy (E62) |