Should-Read: Simon Wren-Lewis: Public Investment and Fiscal Rules

Should-Read: Simon Wren-Lewis: Public Investment and Fiscal Rules: “When I started writing this paper with Jonathan Portes…

…I was genuinely unclear about whether fiscal targets should be for the total deficit… or for the current balance (which excludes it)…. By the time the paper was finalised, and later when it came to proposing a rule that the Labour party could adopt, it was clear to me that any target should be for the current balance, with a separate target for the public investment to GDP ratio.

We can see a very strong argument for doing that right now. Jean Pisani-Ferry is one of a steady stream of economists saying that it really is time to increase public investment, and they are backed up by international organisations. But despite all this being true for some time, there is very little sign of governments taking much notice. As Pisani-Ferry notes: “On average, governments are using the gains implied by lower interest rates to spend a bit more or to reduce taxes, rather than to launch comprehensive investment programs.” The political economy reason… is straightforward enough…. Both current and capital spending have been squeezed…. In a recession it is generally easier and less painful to cut an investment project than fire some nurses or teachers. The danger with deficit targets is therefore than whenever these targets bite, public investment is the first to suffer…

AUTHORS:

Brad DeLong

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