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by Philipp Heimberger
Friday, Jun. 22, 2018 at 6:33 PM
Low-interest rates should create possibilities for expansive budgetary policy. Public investments in the infrastructure and education could benefit future generations by helping raise long-term prosperity and well-being. The one-sided narrowing of budgetary possibilities is excessive
MORE PUBLIC INVESTMENTS ARE SENSIBLE AND NECESSARY
By Philipp Heimberger
[This article published on September 2, 2016 is translated from the German on the Internet, https://awblog.at.]
The austerity policy of the last years led to a sharp decline of public investments. A budgetary policy change of course is urgently necessary on the backdrop of a weak economic growth and high unemployment. A coordinated expansion of public investments would help reduce involuntary mass unemployment in the short-term and raise the economic growth potential in the long-term. This would have positive effects on public finances under the prevailing conditions.
Austerity Policy Causes Harmful Decline in Public Investments in Europe
The turn to austerity policy carried out by political-economic decision-makers in the euro zone in 2010/2011 has left deep marks in public investments. The state spending cuts affected infrastructure spending…
The austerity policy reduced public investments in the so-called core-countries of the euro zone. A 13.1% decline occurred in France between 2010 and 2016 and 15.5% in the Netherlands. German public investments fell 5.1% from the 2010 level… In Austria, traditional public investments declined 1.6% between 2010 and 2016. In Austria as in other European countries, there are pressing necessities in the public infrastructure regarding schools, hospitals, kindergartens and other care facilities as well as greater energy efficiency. Economic policy is narrowed to reaching budgetary policy goals. The mantra of “zero deficits” of public budgets largely dominates in economic policy despite the pressing problem of mass unemployment.
In the last years, the marked reduction in public investments intensifies and prolongs the economic crisis in the euro zone. State spending cuts force down the aggregate economic demand (and production) – firstly, by directly lowering aggregate economic spending and se4condly through indirect negative effects since private businesses invest less with lower demand… A reduction of public investments of 1% of the GDP leads to a GDP decline of more than 1%. The International Monetary Fund had to admit high negative growth effects of austerity policy in the fall of 2014.
Ten Economic Arguments for More Public Investments
Ten important economic arguments could lead to a coordinated expansion of public investments in Austria and other parts of Europe.
1. Public investments stimulate short-term production and employment. This would be very important in economic policy since mass unemployment is the most pressing problem.
2. The “self-healing powers” of the markets do not lead back to full employment in the current macro-economic situation characterized by inadequate demand. Rather, the state must stimulate the economy through an expansive budget policy.
3. Public investments could also create incentives for free enterprise businesses through positive growth- and employment effects. More investment would be an additional impulse to reduce unemployment (“crowding in” of investments).
4. Public investments – particularly in the infrastructure and education – raise the long-term growth potential of a political economy. Future generations profit from improved streets and structures, more schools, better hospitals and care facilities for younger and older persons etc.
5. An investment push would counteract negative hysteresis effects arising from the devaluation of production facilities and from the partial loss of skills of employees because of long-term unemployment. Such hysteresis effects could negatively impact the path-development of a political economy for many decades. Public investments are the suitable means for doing something about this.
6. The argument of critics decrying stimulating production and employment through deficit-financed state spending is wrong. Respected American economists like Brad Delong and the International Monetary Fund have shown more growth increases state revenues. This counters considerable economic under-utilization and even paying off the state debt burden in the medium- and long-term in the case of the hysteresis effect.
7. Current macro-economic conditions in the euro zone are enormously favorable for an expansion of public investment. The continuing low economic growth, high unemployment, continuing debt reductions in the private sector and the constant deflation pressure indicate marked economic under-utilization. In this situation, the state must close the demand gaps by expansive budgetary policy and additional spending and do justice to its stabilization role for securing full employment.
8. The interests on long-term government bonds are at a historically low level. According to data from Eurostat, the interests on 10-year Austrian government bonds in July 2016 were 0.2% The Austrian state budget is relieved by the declining interest-burden that should create possibilities for expansive budgetary policy measures. The potential yields of infrastructure- and education investments are far above the loan interest rate of 0.2%
9. Deficit-financed state spending alone cannot be the burden for coming generations as regularly occurs from the conservative side. Rather public investments in the infrastructure and education create assets whose fruits could benefit future generations by helping raise prosperity and well-being in the long-term.
10. As the economist Mariana Mazzucato explained, state investments – particularly in the research infrastructure, basic research and development – play an important role in promoting innovations that lead to technical progress and increasing material well-being. An interlocking of public and private investment initiatives open up the most promising possibilities for higher productivity that catapults the efficiency of a political economy.
Summary and Conclusions
In summary, the question presses when should the state invest and when should the state not invest? Under the prevailing economic conditions, a comprehensive initiative for public investments is positive and urgently necessary. However, the possibilities for stimulating growth and employment are influenced by the EU-fiscal rules that limit the structural deficit of the entire state to 0.5% in Austria as in other EU countries. The one-sided narrowing of budgetary possibilities is excessive and counter-productive, particularly in bad economic times.
Europe’s states must do everything to strengthen and not only defend their future social investments. In Austria, this is a very central task given the growing population in the cities (especially Vienna) and given other social problems (e.g. integration of refugees in the labor market and society, child care and geriatric care). For Austria, alliances must be forged with other European countries to carry out sensible rule changes that give Europe’s governments more budgetary possibilities in times of high involuntary unemployment. The pressure should be increased both on the export plane and on the ministerial plane.
As pressing for the “golden rule of budgetary policy” would be sensible, new public indebtedness for public investments must be allowed. Since sensible changes of EU fiscal rules cannot be realized from today to tomorrow, the full exhaustion of budgetary possibilities for state investments must be executed in the short-term – through additional non-budgetary financing of public investments or the greater use of the European fund for strategic investments.
Beigewum, “Zero deficit myth,” Austria, 2000
Mariana Mazzucato, “The Entrepreneurial State,” 2018,
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