Publication: Walking Up the Down Escalator : Public Investment and Fiscal Stability
Date
2007-03
ISSN
Published
2007-03
Author(s)
Abstract
Fiscal adjustment becomes like walking
up the down escalator when growth-promoting spending is cut
so much as to lower growth and thus the present value of
future tax revenues to a degree that more than offsets the
improvement in the cash deficit. Although short-term cash
flows matter, a preponderant focus on them encourages
governments to invest too little. Cash flow targets also
encourage governments to shift investment spending off
budget, by seeking private investment in public
projects-irrespective of its real fiscal or economic
benefits. To evade the action of cash flow targets, some
have suggested excluding from their scope certain
investments (such as those undertaken by public enterprises
deemed commercial or financed by multilaterals). These
stopgap remedies might sometimes help protect investment,
but they do not provide a satisfactory solution to the
underlying problem. Governments can more effectively reduce
the biases created by the focus on short-term cash flows by
developing indicators of the long-term fiscal effects of
their decisions, including accounting and economic measures
of net worth, and where appropriate including such measures
in fiscal targets or even fiscal rules, replacing the
exclusive focus on liquidity and debt.
Citation
“Easterly, William; Irwin, Timothy; Servén, Luis. 2007. Walking Up the Down Escalator : Public Investment and Fiscal Stability. Policy Research Working Paper; No. 4158. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/d2aff4ba-a949-5bbc-b433-bc60045d3414 License: CC BY 3.0 IGO.”
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