IMF Working Paper: Government Spending and Economic Growth

A new study from the International Monetary Fund looks at multiple episodes of government spending “booms” across 21 different countries. It does not address whether or not “in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth” (pg. 62) The answer?: “probably very little”.

This conclusion pertains to the drives – the big increases in public capital spending – not necessarily to routine levels of public investment. And furthermore the evidence here  is not about whether public capital can promote growth by averting the emergence of bottlenecks.  Major public investment campaigns continue to be advocated in several countries as a major trigger  for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a  positive effect of public capital on GDP or GDP growth is weak (pg. 62).

It further states that “it is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms” (pg. 4).

Matthew Klein has a really good overview in the Financial Times. Check it out.1