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To What Extent Does Public Investment Impact Long-Run Output? - NIESR
There is a need to increase public investment spending in the United Kingdom to boost economic growth and productivity.
A permanent one per cent rise in public investment as a share of GDP leads to a 2.2 - 2.9 per cent increase in long run output, using a 35-year horizon.
The current UK fiscal framework constrains public investment, as the positive impacts from investment on output often take longer to materialise compared to the short-term debt-reduction targets set by the fiscal rules.
We believe that UK growth and productivity would be enhanced by a sustained increase in public investment. While the recent revamp in the fiscal rules in the 2024 Autumn Budget provides more fiscal space for additional spending, a short-term view with regards to the returns from spending remains through the debt rule, which requires debt to GDP to be falling over just a three-year horizon (after an initial target of 2029-30). Therefore, there continues to be a disincentive to increased public investment that does not produce speedy returns. However, as shown by our analysis, public investment raises GDP over the long term, with these impacts increasing in magnitude over time.
A permanent one per cent rise in public investment as a share of GDP leads to a 2.2 - 2.9 per cent increase in long run output, using a 35-year horizon.
The current UK fiscal framework constrains public investment, as the positive impacts from investment on output often take longer to materialise compared to the short-term debt-reduction targets set by the fiscal rules.
We believe that UK growth and productivity would be enhanced by a sustained increase in public investment. While the recent revamp in the fiscal rules in the 2024 Autumn Budget provides more fiscal space for additional spending, a short-term view with regards to the returns from spending remains through the debt rule, which requires debt to GDP to be falling over just a three-year horizon (after an initial target of 2029-30). Therefore, there continues to be a disincentive to increased public investment that does not produce speedy returns. However, as shown by our analysis, public investment raises GDP over the long term, with these impacts increasing in magnitude over time.
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