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

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A common feature for the new member states is the significance of investment in public goods. 32 Volume13 N°1 2008 EIB PAPERS Decentralisation thus increases the level of government investment in total, and of the components it increases investment in infrastructure (INF); hospitals and schools (HS); and public goods (PG). Decentralisation does not affect the level of redistribution investment. In terms of shares in total government investment, decentralisation increases the relative share of investment in hospitals and schools, at the cost of investment in redistribution. Note, however, that although the relative share of redistribution investment declines with decentralisation, its absolute level does not. The result that decentralisation reduces the share of redistribution investment is difficult to reconcile with the traditional theory of fiscal federalism reviewed earlier. The redistribution variable is meant to capture consumption-oriented local public goods, such as recreational facilities, and the traditional view predicted that decentralisation should lead to an increase, not relative decline, in their provision. In contrast, the results can be more readily interpreted in view of the newer thinking emphasising broader fiscal competition among sub-national units. Decentralisation increases the level of investment in especially infrastructure as well as hospitals and schools, all providing “public inputs” for private firms. What is more, the increase in investment in hospitals and schools suppresses the share of investment in redistribution, suggesting that decentralisation leads to a relative decline in consumption-oriented government investment. It is noteworthy that decentralisation does not lower the level of any type of government investment. This being the case, there is no evidence of decentralisation being associated with tax competition that would have a detrimental impact on the overall level of government investment. We now turn to a description of the composition of government investment in the new member states for which data are available. There are, again, big differences in the composition of government investment between individual NMS, as shown in Figure 5, which also contrasts the composition of government investment in NMS to the cohesion countries. At one end of the spectrum, the Czech Republic invests in government infrastructure even more than the cohesion countries. At the other end of the spectrum, Latvia and the Slovak Republic invest in government infrastructure no more or even less than old EU member states. On the other hand, a common feature for almost all NMS is the significance of investment in public goods, including defence, order and safety, public administration and the environment. Bar in the Czech Republic, the share of public goods is well in excess of one-quarter of aggregate government investment in NMS, 5 compared to one-fifth in the cohesion countries and about one-quarter in other EU-15 countries. 5 In a more detailed breakdown, the shares of defence, order and safety, public administration, and the environment in investment in public goods are, on average, roughly speaking equal in the eight new member states shown in Figure 5. The share of public administration is slightly higher than the others, and to the extent that such investment is linked to the development of institutions necessary for a well-functioning market economy, such investment enhances long-term growth potential.
Figure 5. Composition of government investment in new member states (in percent of GDP, average 2000-05) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 CZ Redistribution Public Goods Hospitals, schools Infrastructure EE Source: Eurostat, own classification LV LT HU PL SI SK Cohesion To conclude this section, let us summarise some key stylised facts of the composition of government investment in Europe. On average, a third is infrastructure investment and another 20 percent investment in hospitals and schools. These two types of government investment, accounting for half the total, are productive from an economic perspective, reducing firms’ costs and boosting human capital. The other half of government investment is roughly evenly split between public goods and redistribution, as defined in this section. As regards differences across country groups, the share of government investment in hospitals and schools as well as redistribution is higher in the old member states (EU-15) than in the new ones. NMS have the biggest share of investment in public goods. In turn, the cohesion countries have – at 40 percent – by far the highest share of infrastructure investment. 3. Government infrastructure investment Having broken down government investment into four economically different categories above, this section zooms in on one of them – government infrastructure investment (“Economic Affairs”, or the intersection A plus B in Figure 1) – seeking to decompose it further. We saw that infrastructure is the single biggest component of government investment in Europe; however, we also saw that it comprises a bewildering array of investment, ranging from roads to government agricultural investment. Our prior was that transportation investment dominates government infrastructure investment; in this section we set to test that prior. Before assessing the share of transport in government infrastructure investment (that is, to figure out the share of A), Box 3 takes a detour around the globe and compares government infrastructure investment in Europe to that in Japan and the United States. In sum, government infrastructure investment remains relatively much more dominant in Japan than in Europe or the United States. Half of government investment is directly economically productive. EIB PAPERS Volume13 N°1 2008 33
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The economic cost of public funds c
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Most taxes are distortionary in tha
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While distorting taxes lead to a we
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The modified approach suggests that
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As the economic cost of public fund
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Recent cost-of-funds estimates acco
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While charging for the use of publi
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The link between user fees and the
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The choice of the social discount r
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The economic cost of public funds c
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High GDP growth in the new member s
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Further productivity gains, includi
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Table 2. Business constraints perce
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Where fiscal positions were sound,
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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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Various empirical studies confirm t
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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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EIB Papers • Volume 13 • No1
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EIB Papers Volume 13. n°1/2008 - European Investment Bank

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