Stimulus Packages and Long-Term Growth

The recession is likely to lower potential output (addressed in more detail later). For this reason too, it is important to attempt to assess the impact of fiscal packages on long-term growth. The composition of fiscal packages, both in terms of revenues and expenditure items, matters for growth. Dhont and Heylen (2009) show that growth is more likely to flow from productive government expenditures, such as those supporting education and research and development (R&D), and low tax rates on capital. An OECD (2008) study shows that, for given revenue flows, different tax combinations can impact differently growth.

So, can stimulus packages also raise potential output? In addition to the tax structure, fiscal stimulus could have a positive impact on long-term growth beyond the multiplier effect to the extent that public investment, in both physical and immaterial infrastructure (such as R&D and education), affects long-term growth. For the impact on potential output to materialize however a number of factors must be taken into account. First the impact of physical infrastructure on output is difficult to pin down and the direction of causality hard to determine empirically. Nevertheless, there is some evidence from annual and multi-year growth regressions that infrastructure investment has positive effects that go beyond the impact expected from an increase in capital stock. Furthermore, infrastructure investment appears to have a nonlinear effect with, on average, a stronger long-term effect on growth at lower levels of provision. These effects are not commonly shared across OECD economies, where there is some evidence of both under- and over-provision and of both efficient and inefficient use of investment.

Second, before undertaking investment in new capacity, it is important to ensure that best use is made of existing infrastructure. User fees and congestion charges can play a key role in ensuring efficient use of scarce infrastructure and also give more accurate signals as to where additional capacity may be warranted. Curbing the anti-competitive practices of incumbent infrastructure operators can also increase effective capacity. Incentive regulation, such as setting price caps for infrastructure services, can help ensure that investment is cost reducing and mimics a competitive environment. Independence and accountability on the part of regulators can help to establish a stable and credible framework for infrastructure investment.

Third, a competitive environment is generally more supportive of the efficient use of resources and there is evidence that removing barriers to entry can foster higher rates of investment in the network industries. Barriers to entry appear to harm investment, especially in the telecommunication and energy sectors, with vertical integration curbing firm-level investment in the electricity sector.

Fourth, the impact of public investment on growth should also be assessed in connection with the provision of other factors of production. One example is investment in research and development and, more broadly, in innovation infrastructure. A given amount of innovation related spending will have different impacts depending on the extent to which complementary factors are available, most notably human capital. Empirical evidence (OECD 2006; Dhont and Heylen 2009) confirms the positive impact on growth of human capital and innovation related activities. Therefore, assessments of the impact on growth of that part of stimulus packages concerned with public investment should also take into account their composition. In this regard, countries have adopted different strategies. As Table 4 [ PDF 72.9KB | 1 page ] shows, even in cases in which governments earmark significant resources in the stimulus packages to innovation support, there is visible variation in terms of composition within the broader category of long-term spending. However, further work is needed to assess the impact of the composition of fiscal packages on long-term growth for a given amount of stimulus.

Download this Paper [ PDF 296.4KB| 23 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.