I have in the past
wondered just how large the majority among academic economists would
be for additional public investment right now. The economic case for
investing when the cost of borrowing is so cheap (particularly when
the government can issue 30 year fixed interest debt) is
overwhelming. I had guessed the majority would be pretty large just
by personal observation. Economists who are not known for their
anti-austerity views, like
Ken Rogoff, tend to support additional public investment.
Thanks to a piece
by Mark Thoma I now have some evidence. His article is actually about
ideological bias in economics, and is well worth reading on that
account, but it uses results from the ChicagoBooth survey of leading
US economists. I have used this survey’s results on the impact of
fiscal policy before, but they have asked
a similar question about public investment. It is
“Because the US has underspent on new projects, maintenance, or
both, the federal government has an opportunity to increase average
incomes by spending more on roads, railways, bridges and airports.”
Not one of the nearly 50 economists surveyed disagreed with this
statement. What was interesting was that the economists were under no
illusions that the political process in the US would be such that
some bad projects would be undertaken as a result (see the follow-up
question). Despite this, they still thought increasing investment
would raise incomes.
The case for additional public investment is as strong in the UK (and
Germany) [1] as it is in the US. Yet since 2010 it appeared the government thought
otherwise. Public net investment, which was 3.2% of GDP in financial
year 2009/10, has fallen to an expected 1.5% of GDP in 2015/6. We are
about to have a spending
review
where non-exempted departments have been asked to look at cuts of at
least 25%. One of those departments is the department of transport,
which is responsible for almost a quarter
of public investment.
However since the election George Osborne seems to have had a change
of heart. First he has implemented
Labour’s proposal of a national infrastructure commission, which
was in turn one of the ideas of the LSE’s growth commission.
If it works it should reduce the number of political white elephants
that US economists worry about. Second, he has talked about spending
£100bn on these projects before 2020. That is a huge sum: the total
for annual gross public investment is currently around £70 billion.
So how do you square £100bn extra public investment with the
government’s goal of achieving surplus by 2019/20? Is the £100bn a
smoke and mirrors number? We will find out when the Autumn Statement
is published. Ignore any numbers quoted by the Chancellor. Instead
have a look at the OBR’s figures for net public investment as a
percentage of GDP (you can find a time series in their databank
here).
In the June budget public investment was expected over the next 5
years to stay at or below the 1.5% of GDP figure. If the numbers in
the Autumn Statement forecast are significantly above that, we will
know that the Chancellor really has started listening to economists.
