Incentives for public investment under fiscal rules
AbstractThe authors explore the relationship between fiscal rules and capital budgeting. The current budgetary approach to limit deficits to a fixed portion of GDP or to balance budgets could undermine incentives to invest in public capital with long-run returns since politicians concerned about electoral prospects would favor expenditures providing immediate benefits to their voters. An alternative budgetary approach is to separate capital from current revenues and expenditures and relax fiscal constraints by allowing governments to finance capital expenditures with debt, as suggested by the golden rule approach to capital funding. But the effect of capital budgeting would be to provide opportunities to politicians to escape the fiscal rule constraints by shifting current expenditures into capital accounts that are difficult to measure properly, thereby leading to increased borrowing. As an alternative, the authors propose a modified golden rule limiting debt finance to a proportion of the government's investment in self-liquidating assets.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3860.
Date of creation: 01 Mar 2006
Date of revision:
Public Sector Economics&Finance; Investment and Investment Climate; Economic Theory&Research; Public&Municipal Finance; Urban Economics;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-05 (All new papers)
- NEP-MAC-2006-03-07 (Macroeconomics)
- NEP-PBE-2006-03-05 (Public Economics)
- NEP-URE-2006-03-27 (Urban & Real Estate Economics)
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