Publication: Fiscal Rules, Public Investment, and Growth
Date
2007-11
ISSN
Published
2007-11
Author(s)
Abstract
Solvency is an intertemporal concept,
relating to the present value of revenues and expenditures,
and encompassing both assets and liabilities. But the
standard practice among policy makers, financial market
participants and international financial institutions is to
assess the strength of the fiscal accounts solely on the
basis of the cash deficit. Short-term cash flows matter, but
a preponderant focus on them can encourage governments to
invest too little, especially during episodes of fiscal
tightening. This has potentially adverse consequences for
growth and, paradoxically, even for fiscal solvency itself.
The paper offers an overview of the links between fiscal
targets, public investment, and public sector solvency.
After reviewing the international experience with public
investment under fiscal adjustment, the paper lays out an
analytical framework to illustrate the consequences of using
the public deficit as a guide to solvency. The paper then
discusses some alternatives to conventional cash deficit
rules and their implications for investment and fiscal solvency.
Citation
“Servén, Luis. 2007. Fiscal Rules, Public Investment, and Growth. Policy Research Working Paper; No. 4382. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/b5072eea-a43c-5a37-a614-c8963192cd2f License: CC BY 3.0 IGO.”
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