Don't rely on public investment to save the day

• Published in: Economic outlook (London. 1977) 2020-01, Vol.44 (1), p.26-29
• Format: Article
• Language: English
• ISSN: 0140-489X; 1468-0319
• DOI: 10.1111/1468-0319.12465

▀ We think public investment in the advanced economies should be increased, but we're also sceptical that, on its own, it can save economies from recession in the event of further negative shocks. ▀ Deteriorating infrastructure and low bond yields make a compelling case for sustained increases in public investment. And given the shortage of safe assets and the global savings glut, higher government borrowing seems unlikely to have big negative repercussions for private sector borrowers. ▀ But the scope for a sustained and aggressive rise in public investment to counter shocks is limited. Even when funds are plentiful, governments often struggle to meet capital spending targets due to other constraints. ▀ Spikes in public investment during downturns typically dry up the capital pipeline, leading to falling investment further ahead. As a result, it's harder to sustain increases in investment, compared to other government spending.