EIB Papers Volume 13. n°1/2008 - European Investment Bank

7. Conclusions
As the main findings have been summarized at the end of each section, four concluding remarks
will do.
First, economic reasoning and empirical evidence suggest that the excess burden of taxation – and its
implication that the economic cost of one euro of public funds exceeds one euro – is too important
to disregard in the appraisal of government expenditure. But it is also true that government
spending – on infrastructure investment, in particular – might have effects that counterbalance the
excess burden. Thus, it would be wrong to consider the excess burden but to ignore effects possibly
offsetting it. That said, estimates of the economic cost of public funds that account for these effects
nonetheless suggest that it costs society more than one euro to transfer one euro from the private
sector to the government.
Second, for the appraisal of public infrastructure investment the most appropriate approach is to
apply an estimate of the ‘conventional’ economic cost of public funds and to assess effects that
possibly counterbalance the excess burden on a case-by-case basis. As the economic cost of public
funds varies across countries, one size does not fit all and country-specific cost estimates should be
used.
Third, policymakers and project appraisal practitioners might wonder whether available estimates
of the cost of funds are reliable enough. Moreover, they might feel that assessing effects possibly
counterbalancing the excess burden is, too, an exercise surrounded by too many uncertainties – and
one taking them beyond the boundaries of project appraisal as commonly done. Clearly, accounting
for the excess burden and effects offsetting it is a challenge. But so is the monetary valuation of
greenhouse gas emissions, for instance, a challenge practitioners shied away from some 10 to 15
years ago, but which has become an integral part of project appraisal since then. Besides, ignoring
the excess burden and effects offsetting it does not mean they have not been valued. On the
contrary, it means they have implicitly been assumed to perfectly offset each other, implying a value
of one for the ‘modified’ economic cost of public funds.
Lastly, there might be political reasons for neglecting the excess burden of taxation in the appraisal
of government investment. After all, the scaling factor expressing the economic cost of public
funds “declares so explicitly that taxation imposes a burden beyond the value of the revenue
raised” (Spackman 2004, p. 488) and – using Browning’s estimate as an illustration – requires that
government investment “must be at least 9-16 percent more productive than private expenditures
to produce a net welfare gain” (Browning 1976, p. 283). It does not take an overly wicked mind to
suspect that this is a message spendthrift policymakers and political parties prefer to disregard.
Economists will continue to argue otherwise.
The fact that the
economic cost of
one euro of public
funds exceeds one
euro is too important
to disregard in the
appraisal of government
expenditure.
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