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The decline in public investment: ``social dominance’’ or too-rigid fiscal rules?

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  • Mar Delgado-Téllez
  • Esther Gordo
  • Iván Kataryniuk
  • Javier J. Pérez

Abstract

Public investment in advanced economies is at historical lows, following a declining trend since the 1980s. Two main hypotheses have been posed to explain this evolution: (i) the ‘social dominance hypothesis’, whereby increased public social spending has been displacing investment from government’s budgets, despite the upward trend witnessed in tax burdens and debt; (ii) fiscal rules’ frameworks, that would have forced governments to reduce investment in their quest for compliance. In this paper, we jointly test the validity of these two duelling explanations using two empirical approaches (panel data models; local projections) for a sample of advanced economies comprising data for the past six decades. We find that both factors are relevant to explain the observed downward trend in investment, with social spending acting as a structural driver, whereas fiscal rules contributed mainly when applied in fiscal consolidation episodes.

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  • Mar Delgado-Téllez & Esther Gordo & Iván Kataryniuk & Javier J. Pérez, 2022. "The decline in public investment: ``social dominance’’ or too-rigid fiscal rules?," Applied Economics, Taylor & Francis Journals, vol. 54(10), pages 1123-1136, February.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:10:p:1123-1136
    DOI: 10.1080/00036846.2021.1990841
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    Cited by:

    1. Brändle, Thomas & Elsener, Marc, 2023. "Do fiscal rules matter? A survey on recent evidence," Working papers 2023/07, Faculty of Business and Economics - University of Basel.
    2. Diego Martínez‐López, 2022. "Subnational borrowing and bailouts: When the federal government looks at the votes (differently) and its borrowing matters," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 609-633, June.
    3. Mario Alloza & Javier Andrés & Pablo Burriel & Iván Kataryniuk & Javier J. Pérez & Juan Luis Vega, 2021. "La reforma del marco de gobernanza de la política fiscal de la Unión Europea en un nuevo entorno macroeconómico," Occasional Papers 2121, Banco de España.
    4. Mario Alloza & Javier Andrés & Pablo Burriel & Iván Kataryniuk & Javier J. Pérez & Juan Luis Vega, 2021. "The reform of the european Union’s fiscal governance Framework in a new Macroeconomic environment," Occasional Papers 2121, Banco de España.
    5. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    6. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Schwächen Fiskalregeln öffentliche Investitionen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(06), pages 22-28, June.
    7. Fernando González & Diego Martínez-López, 2021. "El diseño de reglas fiscales en gobiernos subcentrales. El caso de España," Policy Papers 2021-01, FEDEA.
    8. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    9. Cezara Vinturis, 2023. "How do fiscal rules shape governments' spending behavior?," Economic Inquiry, Western Economic Association International, vol. 61(2), pages 322-341, April.
    10. López-Herrera, Carmen & Cordero, José M. & Pedraja-Chaparro, Francisco & Polo, Cristina, 2023. "Fiscal rules and their influence on public sector efficiency," MPRA Paper 119018, University Library of Munich, Germany.

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    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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