14 December 2020
14 Dec 2020
Fiscal multiplier effect of infrastructure investment
Source: GIH/CEPA analysis
Public investment – which represents a proxy for government investment in infrastructure – is more effective than other types of public spending in increasing economic output, particularly over the medium term. This is the key finding from the GI Hub’s recent analysis of more than 3,000 estimates of the fiscal multiplier from more than 200 academic studies over the last 25 years. This meta-analysis, conducted to support the G20’s Action Plan in Response to the COVID-19 Pandemic, found that public investment has an average fiscal multiplier of about 0.8 within 1 year, and around 1.5 within 2 to 5 years. These multipliers are higher than those found for public spending as a whole, across both timeframes.
We also found that this multiplier effect tends to be larger – at around 1.6 – during the contractionary phase of the economic cycle, suggesting that public investment is generally less likely to ‘crowd out' private economic activity in times of recession.
These findings have important implications for governments across the world as the policy challenge increasingly turns from an immediate response to COVID-19 to longer-term economic recovery. Infrastructure investment can and should become an important element of medium- and long-term stimulus packages to help drive an economic rebound and enable a sustainable transformation of G20 economies.