Five reasons for an "Investing Initiative"

by George Feigl and Jana Schultheiß

[This article published on May 3, 2021 is translated from the German on the Internet, https://awblog.at/5-gruende-fuer-initiative-investieren/.]

Public investments not only bring more employment in the short term, they also increase public wealth and thus enhance the quality of life of the population. Accordingly, they form an important basis for sustainable prosperity and well-being. Although investment at the federal level is already on the rise, it is precisely now that a new Investing initiative is needed from the federal government. Climate protection, digital infrastructure and childcare facilities are the main areas of focus - especially at the municipal level.

Public investment creates prosperity and well-being

Public investments are understood to be expenditures by the government (federal, state and local) that create significant future benefits or can be used over a longer period of time. This distinguishes it from current spending to maintain public services with immediate benefits. Public investment creates the public infrastructure for a good life in a modern and productive society: from health, social, leisure and educational facilities to transport, energy, communications and waste disposal systems and basic research. High-quality infrastructure is also an essential prerequisite for increasing the productivity of private companies - for example, via reduced transport costs or faster communications technologies.

Public investment over and above depreciation thus increases or renews the public capital stock: the expansion or modernization of infrastructure increases public assets. After all, broad sections of the population benefit from more schools and hospitals, a better developed bus and rail system or affordable housing with high energy standards. Thus, public investments contribute significantly to the creation of social prosperity and well-being - especially for future generations. The Austrian population has grown by more than 500,000 in the last ten years. The resulting increase in demand for infrastructure alone highlights the need for public investment in order to safeguard Austria's high level of prosperity in the long term.

High employment potential

The special economic importance of public investment is due to the fact that it not only expands production opportunities in the long term, but can also boost overall demand for goods and thus production and employment in the short term. Public investment improves the sales prospects of private companies directly and via indirect income effects, so that these companies also expand their investments, at least in part ("crowding-in" of investments). In this way, a new economic upswing with a corresponding employment effect can be set in motion.

Public investment is therefore a key tool of the state in the fight against unemployment and can also provide important impetus in times of COVID-19 mass unemployment. Based on economic studies, public investments amounting to one percent of economic output lead to an increase of well over one percent, with corresponding employment effects. Only the direct expansion of public employment for social services has a higher employment effect (which is why this should also be part of an investment and employment package). Targeted investments in care facilities can have an indirect positive impact on female employment, as they increase the supply of care in the medium term and also create employment in areas with a high share of women.

Ecologically crucial

Achieving the Paris climate targets is a Herculean task. The public sector has a central role to play if this "mission" - embedded in the UN Sustainable Development Goals - is to succeed. The public sector, including controlled companies, must quickly invest billions to enable climate-friendly mobility and energy supply, to renew public buildings and the vehicle fleet, and to mitigate the problems of increased weather extremes for cities and rural areas. The state must no longer be the laggard, but must move ahead and set the course for the socio-ecological transformation in order to pull the private sector along - especially in research.

Future generations will thus benefit several times over from today's public investments: Through more and more sustainable public assets that provide essential services and a good life, and directly through more employment and income opportunities for their parents, which also improve opportunities for their children. Postponing investments with reference to a larger "debt backpack" to be avoided by additional financial resources does them more harm than good.

Raising investment potential in communities and cities

Of the EUR 12.8 billion in gross government investment in 2020, a good quarter will go to municipalities and cities. While there was a significant increase at the federal level (+0.6 to 7.4 billion euros), municipal investments fell nominally by 3 percent (to 3.5 billion euros) - despite initial aid measures by the federal government.

The reason: cities and municipalities are subject to a highly procyclical fiscal regime, since their revenue shares collapse in crises, but they can hardly tap other revenues in the short term and are limited in their borrowing. In the wake of the financial and economic crisis a good decade ago, they therefore all too often apply the austerity pen to investments, which are easiest to postpone in the short term. The relative share of investments in the budgets of cities and municipalities is roughly twice as large as at the federal and state levels, which are more heavily influenced by transfers (mainly federal) and personnel (mainly state):

Since investments by cities and municipalities are central in the short and long term, especially for the regional economy, employment and services of general interest locally, and have a particularly underutilized ecological potential, it is important not only to stabilize the investment ratio, but to expand it over several years. An investment backlog like the one between 2010 and 2013 must not be allowed to recur.

Asset accumulation at zero cost

In the current situation, it is clear that expanding public investment is associated with higher debt. The expected overall benefit is clearly positive, but in any case, greater than the currently non-existent cost of additional debt: for more than a year, the average interest rate on federal bonds has been negative.

At the same time, the second major barrier to public wealth creation has been suspended, namely national and European budget rules. In normal times, these preclude a growing public debt ratio even if it is matched by an equally large increase in assets on the other side of the balance sheet.

The short-term opportunity to build up public assets at zero cost should not be missed. At the same time, it is important to change the budget rules in the medium term so that investment is not restricted again in the post-crisis consolidation phase, as was the case at least at European level after the economic and financial crisis.

Investing initiative - when, if not now?

In view of the devastating situation on the labor market and the foreseeable removal of most pandemic-related restrictions, an Investing Initiative is urgently needed. It must tackle mass unemployment and create sustainable jobs, with a mix of employment policies and public investment. It is time to invest our way out of the crisis and set the course for environmental, social and economic transformation - and thus the sustainable development of prosperity and well-being.

Cities and municipalities are called upon to participate in this initiative. This can be done not only through additional debt (which must also be made possible on the part of the supervisory authorities), but also requires further financial support from the state, federal and EU levels.

Such an "Investing Initiative" can be easily financed through additional new borrowing at even slightly negative interest rates - provided that the budget rules continue to be handled flexibly in the short term. In the medium term, however, they must be reformed in any case, since - as is known from house building or the private sector - debt generally makes sense if public assets also increase accordingly at the same time.

Georg Feigl is a consultant for public budgets and wealth-oriented or European economic policy at the Department of Economics and Statistics of AK Vienna; co-organizer of the European TUREC network (Trade-Union Related Economists); autumn 2013: visiting researcher at Fundación 1° de Mayo in Madrid; university lecturer on a case-by-case basis.

Jana Schultheiß is a consultant for public budgets and the welfare state at the Department of Economics and Statistics of AK Vienna and active in BEIGEWUM (Advisory Board for Social, Economic and Environmental Alternatives).