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Incentives for public investment under fiscal rules

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  • Mintz, Jack M.
  • Smart, Michael

Abstract

The 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 Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3860.

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Date of creation: 01 Mar 2006
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Handle: RePEc:wbk:wbrwps:3860

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Keywords: Public Sector Economics&Finance; Investment and Investment Climate; Economic Theory&Research; Public&Municipal Finance; Urban Economics;

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References

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  1. Poterba, James M., 1995. "Capital budgets, borrowing rules, and state capital spending," Journal of Public Economics, Elsevier, vol. 56(2), pages 165-187, February.
  2. Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
  3. Philip R. Lane, 2002. "The Cyclical Behaviour of Fiscal Policy: Evidence from the OECD," Trinity Economics Papers 20022, Trinity College Dublin, Department of Economics.
  4. Buiter, Willem H, 2001. "Notes on 'A Code for Fiscal Stability.'," Oxford Economic Papers, Oxford University Press, vol. 53(1), pages 1-19, January.
  5. Marc Robinson, 2002. "Accrual accounting and Australian fiscal policy," Fiscal Studies, Institute for Fiscal Studies, vol. 23(2), pages 287-300, June.
  6. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
  7. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  8. Fabrizio Balassone & Daniele Franco, 2000. "Public investment, the Stability Pact and the ‘golden rule’," Fiscal Studies, Institute for Fiscal Studies, vol. 21(2), pages 207-229, June.
  9. Alt, James E. & Lassen, David Dreyer, 2006. "Fiscal transparency, political parties, and debt in OECD countries," European Economic Review, Elsevier, vol. 50(6), pages 1403-1439, August.
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Citations

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Cited by:
  1. Bom, Pedro R.D. & Ligthart, Jenny E., 2014. "Public infrastructure investment, output dynamics, and balanced budget fiscal rules," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 334-354.
  2. Easterly, William & Irwin, Timothy & Serven, Luis, 2007. "Walking up the down escalator : public investment and fiscal stability," Policy Research Working Paper Series 4158, The World Bank.
  3. Frédéric Marty, 2007. "Partenariats public-privé, règles de discipline budgétaire, comptabilité patrimoniale et stratégies de hors bilan," Documents de Travail de l'OFCE 2007-29, Observatoire Francais des Conjonctures Economiques (OFCE).
  4. Pereira, Ricardo Antônio de Castro & Ferreira, Pedro Cavalcanti Gomes, 2007. "Efeitos de Crescimento e Bem-estar da Lei de Parceria Público-Privada no Brasil," Economics Working Papers (Ensaios Economicos da EPGE) 648, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Calderon, Cesar & Serven, Luis, 2010. "Infrastructure in Latin America," Policy Research Working Paper Series 5317, The World Bank.
  6. Maskin, Eric & Tirole, Jean, 2008. "Public-private partnerships and government spending limits," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 412-420, March.
  7. Groneck, Max, 2008. "A Golden Rule of Public Finance or a Fixed Deficit Regime? Growth and Welfare Effects of Budget Rules," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-7, University of Cologne, FiFo Institute for Public Economics.
  8. Ward Romp & Jakob de Haan, 2007. "Public Capital and Economic Growth: A Critical Survey," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(s1), pages 6-52, 04.
  9. Chiara Del Bo & Massimo Florio & Silvia Vignetti & Emanuela Sirtori, 2011. "Additionality and regional development: are EU Structural Funds complements or substitutes of national Public Finance?," Working Papers 201101, Centre for Industrial Studies (CSIL).
  10. Jörg-Uwe Hahn & Kai A. Konrad & Eckhard Janeba & Max Groneck & Robert C. Plachta, 2008. "Föderalismuskommission II: Neue Schuldenregelung für Bund und Länder und Altschuldenhilfe - wie sollten die Finanzbeziehungen von Bund und Ländern neu geordnet werden?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 61(09), pages 03-14, 05.
  11. Khalid Abu-Ismail & Rathin Roy & Raquel Almeida Ramos, 2012. "Is there Fiscal Space for Financing an Arab Development Transformation?," Working Papers 88, International Policy Centre for Inclusive Growth.
  12. Groneck, Max, 2010. "A golden rule of public finance or a fixed deficit regime?: Growth and welfare effects of budget rules," Economic Modelling, Elsevier, vol. 27(2), pages 523-534, March.
  13. Ferreira, Pedro Cavalcanti Gomes & Araújo, Carlos Hamilton Vasconcelos, 2006. "On the Economic and Fiscal Effects of Infrastructure Investment in Brazil," Economics Working Papers (Ensaios Economicos da EPGE) 613, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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