Series: Working Papers. 2025.
Author: Mar Delgado-Téllez, Esther Gordo, Iván Kataryniuk and Javier J. Pérez.
Topics: Fiscal policy | Business investment | General government | European Union | Population and ageing.
Published in: Applied Economics, Volume 54, Issue 10, pp 1123-1136, February 2022
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Abstract
Public investment in advanced economies is at historical lows, and shows a declining
trend since at least the 1980s. Two main hypotheses have been posed to rationalize this
fact. On the one hand, the “social dominance hypothesis” claims that this is related to
structural factors, given the upward social expenditure trends related to ageing populations
and social preferences, and the operation of the government budget constraint (limits
to further increase significantly tax revenues and public debt, in a context of secular
stagnation). On the other hand, another branch of the literature indicates that too-rigid
fiscal rule frameworks cause fiscal retrenchment episodes to hinge heavily on public capital
expenditure, which does not recover enough in the subsequent expansion, creating a sort
of downward hysteresis behaviour in this budgetary item. In this paper we look jointly at
both sets of duelling explanatory factors, and show that both are key to understanding
public investment dynamics in advanced economies over the past decades.