The recently released OBR Discussion Paper on ‘Public investment and potential output’2 helps to emphasise our point that well directed public investment can reduce the debt to GDP ratio in the long run by raising the denominator by more than the initial increase in public indebtedness, but that it would most likely take more than the five years focused on by the current fiscal rules to do so. [...] The OBR paper outlines three types of lags: • Time to spend – which is the lag between the announcement of a public investment project and the point at which the investment spending commences. [...] We think it unlikely that this is the case, though the argument centres around the question of the rate at which the capital stock depreciates. [...] But we would question the focus on the flow of public investment rather than the stock, which would make more sense from the perspective of potential output, which is related to the levels of capital, labour and productivity. [...] General equilibrium effects Although the key findings from the report in terms of the impact on potential output of a 1 percentage point increase in the share of public investment over the long run seem reasonable and are not that different from the findings in our draft working paper, they are based on a ‘model’ (presented in section 4 of the OBR paper), which is a simple accounting exercise.
- Pages
- 4
- Published in
- United Kingdom
