Now they tell us. The IMF and infrastructure investment
The IMF have issued a new assessment of the effects and desirability of infrastructure investment. For some, their conclusions will hardly be surprising, but running contrary to the orthodoxy of the previous five years as well as the framing of the coming UK election – where nothing is more important than austerity – it is worth reviewing their key points. The IMF conclude:
- Infra-spend boosts output and capacity.
… an increase in public infrastructure investment affects output both in the short term, by boosting aggregate demand through the fiscal multiplier and potentially crowding in private investment, and in the long term, by expanding the productive capacity of the economy with a higher infrastructure stock (p. 81).
They offer two multipliers, a short-term one of 0.4 and medium-term of 1.4. The latter is basically consistent with Obama’s original multiplier, as estimated by the Council of Economic Advisers. It can be interpreted as saying that increased spending of £1 billion will increase GDP by £1.4 billion, with a corresponding impact on employment (though the IMF do not go into the latter). Sadly for the UK, the OBR judge the investment multiplier is 1.0 per cent.
- Not only does infra-spend increase output, it can be self-financing. The IMF estimates for advanced economies:
show that higher public investment spending typically reduces the debt-to-GDP ratio both in the short term (by about 0.9 percentage point of GDP) and in the medium term (by about 4 percentage points of GDP) (82)
So higher spending on investment reduces the public debt. This follows as the multiplied level of income and employment leads to higher tax revenues and reduced benefit expenditures.
- Ultimately the recommendation is that
economies with clearly identified infrastructure needs and efficient public investment processes and where there is economic slack and monetary accommodation, there is a strong case for increasing public infrastructure investment. (77)
- Moreover, the spending should be financed not by reducing spending or increasing taxes elsewhere, but through issuing debt. (They do not ponder whether the central bank might then buy that debt through QE …)
Moreover, evidence from advanced economies suggests that an increase in public investment that is debt financed could have larger output effects than one that is budget neutral, with both options delivering similar declines in the public-debt-to-GDP ratio. (77)
It is unsurprising that the IMF feel obliged to talk about slack, though as far as I can judge slack plays no part in their results. Moreover the analysis implies that capacity is increased by such spending; it is hard to see why perceptions about limited capacity should stand in the way of something that would increase capacity. Certainly in the UK with 2 million unemployed, 3.4 million underemployed and private investment as a share of GDP towards the bottom of international comparisons, public infrastructure sending seems essential. Indeed, it seems hard to see why these arguments were not relevant several years ago when austerity policies were first imposed.