Incentives for public investment under fiscal rules

Jack Mintz and Michael Smart

No 3860, Policy Research Working Paper Series from The World Bank

Abstract: The authors explore the relationship between fiscal rules and capital budgeting. The current budgetary approach to limit deficits to a fixed portion of GDP or to balance budgets could undermine incentives to invest in public capital with long-run returns since politicians concerned about electoral prospects would favor expenditures providing immediate benefits to their voters. An alternative budgetary approach is to separate capital from current revenues and expenditures and relax fiscal constraints by allowing governments to finance capital expenditures with debt, as suggested by the golden rule approach to capital funding. But the effect of capital budgeting would be to provide opportunities to politicians to escape the fiscal rule constraints by shifting current expenditures into capital accounts that are difficult to measure properly, thereby leading to increased borrowing. As an alternative, the authors propose a modified golden rule limiting debt finance to a proportion of the government's investment in self-liquidating assets.

Keywords: Public Sector Economics&Finance; Investment and Investment Climate; Economic Theory&Research; Public&Municipal Finance; Urban Economics (search for similar items in EconPapers)
Date: 2006-03-01
New Economics Papers: this item is included in nep-acc, nep-mac, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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