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Vision Versus Prudence: Government Debt Financing of Investment

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  • John Freebairn

    () (Department of Economics, The University of Melbourne)

  • Max Corden

    (Department of Economics, The University of Melbourne)

Abstract

This article explores the arguments for and against the use of government debt to finance large-scale public investments. Relative to the options of higher taxation or lower other expenditures, debt finance means that both the costs and the benefits of the investment fall on future generations. Debt funded public investments can be an important component of a fiscal stimulus policy package, especially when the effectiveness of monetary policy is limited. While the vision arguments presume socially beneficial investment projects are chosen, political choices often involve projects with low benefit cost ratios. More debt involves higher and higher costs, not only interest costs, but also laxer fiscal choices, a weaker basis for macroeconomic policy to counter future economic shocks, and in extreme cases a loss of policy autonomy. An independent and transparent body to undertake benefit cost assessments of investment projects, and with public release and scrutiny, would support a higher level of debt finance.

Suggested Citation

  • John Freebairn & Max Corden, 2013. "Vision Versus Prudence: Government Debt Financing of Investment," Melbourne Institute Working Paper Series wp2013n30, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2013n30
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    File URL: http://melbourneinstitute.unimelb.edu.au/downloads/working_paper_series/wp2013n30.pdf
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    More about this item

    Keywords

    Government investment; fiscal policy; debt finance;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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