Fiscal stimuli and the quality of public investment

[petagny]

Robert Barro writes in the FT today. There are not many of his ideas that I would usually agree with - particularly the economic benefits of cutting marginal tax rates for the better off, which is more likely to result in boosting asset prices than an increase in entrepreneurial activity and investment - but I do agree that '...government spending is warranted only if it passes the usual hurdles of social rates of return...'. There's been lots of talk from Democrats in the US about the job creating benefits of investment in public infrastructure and very little about economic rates of return, although it is reasonably evident that there must be plenty of high return projects out there among the country's neglected infrastructure stock. This all suggests the need to have pipeline of well-prepared projects, somewhat greater than the likely availability of resources, so that there are projects ready to move when the cost of capital for government comes tumbling down, as is the case currently  - yields on 10-year UK and US government bonds are at or near all-time lows. The difficult thing is getting the balance right: this should not be seen as an invitation for spending agencies to prepare projects costing many times in excess of what is ever likely to become available and failing to prioritise among these -  preparing good projects also costs money.

Is this a dangerous idea from the point of view of keeping the lid on upward fiscal pressures? If not, how should we define 'somewhat greater'?

http://www.ft.com/cms/s/0/78abaf5c-be11-11e0-ab9f-00144feabdc0.html#axzz1TIMSZ5Qs

[Napodano]

In my opinion there is no possibility to define anything like 'somewhat greater' list of investment projects ('greater' than resources available).

I have become wary of politicians and bureaucrats over the years and any 'fissure' will get the dam tumbling down. Strict public investment management and budget rules for new investment projects should always apply.

I undertsand the concept of pipeline of investment projects and time-lag between planning and implementation of captial projects. Yet, I am worried by recent trends in PFM which are calling for a return to PIPs, Public Investment Programmes.

[petagny]

Napodano's line is a tough one and probably appropriate in many countries. It's also consistent with Robert Barro's line: he suggests that temporary tax cuts are the best form of fiscal stimulus (perhaps borne out by the VAT cut - now reversed - in the UK?). If we go back to Keynesian multipliers though, we should remember that tax cuts are less effective than direct public spending - theoretically at least.

The new head of the IMF is, however, suggesting the need for further fiscal stimulus in those countries that can manage it (probably her comments are aimed at Germany, but the 10 year cost of borrowing for the UK Government is also at or near an all time low - a result of fiscal prudence or excess saving?). To quote Christine Lagarde (my underlining):

‘Debt-reduction strategies must be based on concrete and substantive commitments – not just words – but the impact on the economy can be set with a delay. Policy actions can focus on areas where the pressure is mounting tomorrow, but have little effect on demand today – such as reforming entitlements or restructuring the tax system. At the same time, short-term measures must be supportive of growth, yet economical in terms of the impact on fiscal sustainability, and can include policies supporting employment creation, advancing planned infrastructure and easing adjustment in housing markets.’

How do you advance planned infrastructure in a hurry if projects have not been thoroughly prepared? Not easy, particularly as Lagarde is also emphasising the need for fiscal tightening over the medium-term ('Goldilocks' fiscal policy as she calls it - not too hot and not too cold). The 'hump' in infrastructure spending could therefore come at exactly the wrong time if it takes too long to pump up the scale of the programme.

Practically speaking, it's very difficult to press the accelerator on infrastructure in a country like the UK, where meeting the requirements of planning laws is usually the key to the pace at which projects can be implemented and not fiscal constraints. I also doubt that there are many opportunities for increasing the pace of implementation of a multi-billion pound multi-year scheme like London'd Cross-Rail - engineering considerations will now be driving the timetable more than financing.