Public investment in Europe:Evolution and determinants

Eric PeréeHead, Economic and Financial Studies, EIB

Strengthening public investment and managing fiscal risks from PPPs,

Budapest, 7-8 March, 2007

2Eric PeréeEconomic and Financial Studies, EIB

ContentsContents

Public investment: What is it (not)?

Public investment: trends and composition

Determinants of public investment

Conclusions

3Eric PeréeEconomic and Financial Studies, EIB

Public investment: What is it (not)?Public investment: What is it (not)?

IT IS: Investment spending financed directly from the budget of the federal or subnational government.

IT IS NOT: Investment spending by enterprises — even if they are state-owned.

4Eric PeréeEconomic and Financial Studies, EIB

ContentsContents

Public investment: What is it (not)?Public investment: What is it (not)?

Public investment: trends and composition

Determinants of public investmentDeterminants of public investment EMU, PPPsEMU, PPPs

ConclusionsConclusions

5Eric PeréeEconomic and Financial Studies, EIB

Public investment: Public investment: downtrend in “non-cohesion” EU-15downtrend in “non-cohesion” EU-15

1.5

2.5

3.5

4.5

5.5

1970 1980 1990 2000

EU-15 4 largest 6 others

Source: OECD, own calculations

Public investment in % of GDP (GDP weighted averages)

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Public investment: Public investment: uptrend in Cohesion and EU-8uptrend in Cohesion and EU-8

1.5

2.5

3.5

4.5

5.5

1970 1980 1990 2000

EU-15 Cohesion EU-8

Source: OECD, own calculations

Public investment in % of GDP (GDP weighted averages)

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Public capital stocks continue to growPublic capital stocks continue to grow

“Non-cohesion” EU-15 public investment flows trended down, but no clear sign of fall in public investment in cohesion countries.

But EU-15 public capital stocks have:

Stayed stable in relation to GDP

Grown in real terms

Optimal size of public capital stocks?

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Half of public investment infrastructure,Half of public investment infrastructure,with big cross-country differenceswith big cross-country differences

0

1

2

3

4

GE FR IT UK AT BE DK FI NL SW

Infra HC infra

Public goods Redistribution

Source: New Cronos, own calculations and definitions

Investment by general government (in % of GDP, average 2000-05)

9Eric PeréeEconomic and Financial Studies, EIB

Half of public investment infrastructure,Half of public investment infrastructure,with big cross-country differenceswith big cross-country differences

0

1

2

3

4

5

GR SP PT CZ ES LV LT HU PL SN SV

Infra HC infra

Public goods Redistribution

Source: New Cronos, own calculations and definitions

Investment by general government (in % of GDP, average 2000-05)

10Eric PeréeEconomic and Financial Studies, EIB

ContentsContents

Public investment: What is it (not)?Public investment: What is it (not)?

Public investment: trends and compositionPublic investment: trends and composition

Determinants of public investment

ConclusionsConclusions

11Eric PeréeEconomic and Financial Studies, EIB

Net worth turned negative Net worth turned negative

-80

-60

-40

-20

0

20

40

60

AT BE DK FI FR DE GR IR IT NL PT SP SW UK

1981 2001

Source: Kamps (2004), OECD

Public capital less public debt as a share of GDP, %

12Eric PeréeEconomic and Financial Studies, EIB

EU-15 public investmentEU-15 public investmentnot affected by EMUnot affected by EMU

EMU fiscal rules often blamed for downtrend in EU-15 public investment

Empirical evidence suggests that EMU, per se, has not affected public investment in EU-15, and certainly not in Cohesion countries

Instead, drawn-out fiscal problems and consolidation, unrelated to EMU, explain the downtrend in EU-15

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PPPs geographically concentrated PPPs geographically concentrated

8%

40%

23%

UK others

UK (LU)

UK (CTRL)

Portugal

Italy

Greece

Spain

Netherlands

Others

Source: ProjectWare, HMT

Signed value of PPP contracts, 1995-2003 (total €108 billion)

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PPPs not turned the trend even in UKPPPs not turned the trend even in UK

0

1

2

3

4

5

6

1970 1980 1990 2000

Source: OECD, HMT

Public investment as a share of GDP, %

Public investment without PPPs

Public investment plus PPPs

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PPPs significant in UK, Portugal PPPs significant in UK, Portugal

0

1

2

3

4

5

6

GR IR IT NL PT SP UK UK exclCTRL

PPP

Public I

Source: ProjectWare, HMT, OECD

Signed PPP contracts (stock) and public investment (flow), in % of GDP (average 1995-2003)

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ConclusionsConclusions Public investment is investment by the government.

It is not investment by (public) enterprises.

Public investment, as a share of GDP, has declined in non-cohesion countries only. Even there, public capital stocks have not shrunk.

The decline is due to drawn-out episodes of fiscal consolidation, unrelated to EMU’s fiscal rules per se.

PPPs have been geographically concentrated and significant in size only in the UK and Portugal.

17Eric PeréeEconomic and Financial Studies, EIB

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Infrastructure accounts forInfrastructure accounts forhalf of public investment half of public investment

0%

20%

40%

60%

80%

100%

GE FR IT UK AT BE DK FI NL SWSource: New Cronos, own calculations and definitions

in % of total investment by general government (average 2000-05)

Infra

HC infra

Public goods

Redistribution

19Eric PeréeEconomic and Financial Studies, EIB

Infrastructure accounts forInfrastructure accounts forhalf of public investmenthalf of public investment

0%

20%

40%

60%

80%

100%

GR SP PT CZ ES LV LT HU PL SN SVSource: New Cronos, own calculations and definitions

in % of total investment by general government (average 2000-05)

Infra

HC infra

Public goods

Redistribution