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

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Different types of government investment have different economic roles. 26 Volume13 N°1 2008 EIB PAPERS 2. Composition of government investment 2 This section presents the key stylised facts about the composition of government investment in the European Union. The underlying data are based on the functional classification of government expenditure in the 1993 UN System of National Accounts and in the 1995 European System of Accounts (ESA 95). 3 The focus is therefore on the past decade or so; longer-term developments are discussed in Section 4. The section starts with a presentation of the functional classification, followed by a description of the stylised facts in EU-15 (old member states of the European Union) and subsequently in the new member states. To be precise, “government investment” is shorthand for gross capital formation of the general government, which comprises the central and sub-national (regional, local) governments as well as social security funds. It includes changes in inventories, which may create some undesired noise for our analysis; however, the breakdown between gross fixed capital formation and changes in inventories is not available. Also, our variable is measured gross of consumption of fixed capital, but net of sales of fixed assets. The latter implies that government investment below does not exactly measure new investment alone. 4 The functional breakdown of government investment thus defined is presented in Table 1. The righthand side column shows the functional classification (Classification of Functions of Government, COFOG for short) in ESA 95 (Eurostat 2007). The left-hand side shows our own aggregation of the ten available “functions” into four types of government investment with economically distinct roles. Table 1. Functional breakdown of government investment Aggregation ESA 95 COFOG 1. Infrastructure (INF) Economic Affairs 2. Hospitals and schools (HS) Health Education 3. Public Goods (PG) Defence General Public Services Environment Order and Safety 4. Redistribution (RED) Housing Recreation Social Protection Source: Eurostat, own aggregation The four different types of government investment affect the economy through different channels, with varying degrees of directness, and over different time horizons. Government investment in infrastructure, consisting of just Economic Affairs in the ESA 95 COFOG, seeks to measure government investment in traditional infrastructure, mainly transport. This type of government investment has the most direct economic impact by reducing firms’ production and transaction 2 This section draws on Kappeler and Välilä (2007), and Perée and Välilä (2008). 3 The data are available through Eurostat’s website at http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1090,30070682, 1090_33076576&_dad=portal&_schema=PORTAL. 4 Gross (fixed) capital formation does not include ordinary maintenance of fixed assets, but it includes major improvements of fixed assets, such as rehabilitation of a road.
costs. The economic impact of government investment in health and education sectors is more long-term and less direct in character, as it facilitates the building up and maintenance of the economy’s stock of human capital. Investment in public goods affects the economy’s allocative efficiency indirectly through framework conditions for productive activity. Finally, redistribution affects the economy’s income distribution rather than allocative or productive efficiency per se. Government investment in infrastructure (“Economic Affairs”, illustrated by the intersection A plus B in Figure 1) will be the focus of Sections 3 and 4. It comprises a number of different sectors, including Agriculture; Fuel and energy; Mining, Manufacturing and construction; Transport; Communication; R&D; and others. Among these sectors, Transport is likely to be by far the dominant recipient of government investment; exactly how dominant it is will be the topic of Section 3. In addition to infrastructure investment, some other aggregates shown in Table 1 contain undesirable “noise” as no further breakdowns of the right-hand side “functions” are available. For example, government investment in water supply and wastewater management are not part of infrastructure as one would wish; instead, they are part of redistribution (Housing) and public goods (Environment), respectively. Similarly, one would wish to include street lighting in public goods; now it is included in Housing, and thereby redistribution. It is important to acknowledge that investment by companies owned by the government sector but run on a commercial basis is not included in our data, as explained in Box 1. For example, investment by energy companies owned by the government sector is not included in government investment in infrastructure; rather, it is classified as corporate investment in national accounts statistics as long as such companies are commercially run. Note that government transfers to such companies to finance their infrastructure investment are also not included. Similarly, when comparing the data across countries, it is important to bear in mind that the institutional framework for providing public services differs between countries. Thus, water or sewage networks may belong to municipalities in one country and to commercially run companies in another country. In the former case they would be included in our data, in the latter case they would be excluded from them. With these caveats in mind, and following the classification presented in Table 1, Figure 2 shows the breakdown of government investment in EU-15 as a group; separately in the cohesion countries (Greece, Ireland, Portugal and Spain); and also in the new member states (NMS). Two observations stand out from Figure 2. First, the share of government investment in infrastructure is on average about one-third of aggregate government investment in EU-15 and in NMS, but higher (40 percent) in the cohesion countries. This is striking, especially considering that “government investment” and “infrastructure investment” are often used synonymously in both theoretical and empirical literature. If we include investment in hospitals and schools, which is sometimes considered part of an economy’s infrastructure broadly defined, we still only get to one-half of total government investment. The second, and related, observation from Figure 2 is that infrastructure investment in NMS is somewhat higher than in old EU member states, but below the level in the cohesion countries. While it would be hazardous to draw far-reaching conclusions based on the composition of recent investment flows alone, one can nevertheless take Figure 2 to imply that there has not been any obvious convergence of economically productive government capital stocks between the new member states and especially the cohesion countries. Investment by commercially-run companies, even when state owned, is classified as corporate-sector investment. EIB PAPERS Volume13 N°1 2008 27
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High GDP growth in the new member s
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Despite progress, infrastructure de
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Table 7. Infrastructure indicators
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EU funds provide additional resourc
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In some new member states there is
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PPPs offer new opportunities to fin
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Strong legal and institutional fram
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Additional fiscal reporting - even
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Fiscal adjustment and reforms need
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