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To What Extent Does Public Investment Impact Long–Run Output?

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  • Monica George Micail

Abstract

There is a need to increase public investment spending in the United Kingdom to boost economic growth and productivity. In this topical feature, we use NiGEM to estimate the effects of public investment on supply (long–run trend output). We apply several scenarios using different assumptions regarding expectations, fiscal policy and monetary policy. We find that a permanent one per cent rise in public investment as a share of GDP leads to a 2.2 – 2.9 per cent increase in long run output, using a 35–year horizon. We also measure the impact of a similar sized shock that lasts for only one year and find that it leads to a 0.7–0.8 per cent increase in GDP within a year, but this impact quickly fades if the rise in investment is not sustained. The current UK fiscal framework constrains public investment, as the positive impacts from investment on output often take longer to materialise compared to the short-term debt-reduction targets set by the fiscal rules.

Suggested Citation

  • Monica George Micail, 2025. "To What Extent Does Public Investment Impact Long–Run Output?," National Institute UK Economic Outlook, National Institute of Economic and Social Research, issue 17, pages 95-102.
    • Handle: RePEc:nsr:niesra:i:17y:2025p:95-102
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