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

Author

Listed:
  • 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.

Suggested Citation

  • 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. Potrafke, Niklas, 2025. "The economic consequences of fiscal rules," Journal of International Money and Finance, Elsevier, vol. 153(C).
    3. 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.
    4. Ardanaz, Martín & López, Zoila Llempén & Puig, Jorge & Valencia, Oscar, 2025. "Public investment multipliers and the role of efficiency: new evidence for emerging markets," Journal of Macroeconomics, Elsevier, vol. 86(C).
    5. 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.
    6. 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.
    7. Thomas Brändle & Marc Elsener, 2024. "Do fiscal rules matter? A survey of recent evidence," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 160(1), pages 1-38, December.
    8. Cezara Vinturis, 2023. "How do fiscal rules shape governments' spending behavior?," Economic Inquiry, Western Economic Association International, vol. 61(2), pages 322-341, April.
    9. Blesse, Sebastian & Dörr, Luisa & Dorn, Florian & Lay, Max, 2026. "Do fiscal rules undermine public investments? A review of empirical evidence," European Journal of Political Economy, Elsevier, vol. 91(C).
    10. Philipp Weber & Laura A. Zell & Lars P. Feld & Christoph A. Schaltegger, 2024. "Functionality of Fiscal Rules in a Low Interest Rate Environment – New Empirical Results for Swiss Cantons," CESifo Working Paper Series 11351, CESifo.
    11. 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.
    12. Fernando González & Diego Martínez-López, 2021. "El diseño de reglas fiscales en gobiernos subcentrales. El caso de España," Policy Papers 2021-01, FEDEA.
    13. Athiphat Muthitacharoen & Phatarakorn Thongsathit & Tapanat Paiboonsin, 2026. "Efficiency at a Cost: How a Fiscal Rule on Disbursement Timelines Shifted Public Investment Toward Repairs," PIER Discussion Papers 246, Puey Ungphakorn Institute for Economic Research.
    14. 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.

    More about this item

    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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