Incentives for Public Investment Under Fiscal Rules

The authors explore the relationship between fiscal rules and capital budgeting. The current budgetary approach to limit deficits to a fixed portion of GDP or to balance budgets could undermine incentives to invest in public capital with long-run returns since politicians concerned about electoral prospects would favor expenditures providing immediate benefits to their voters, according to the authors. An alternative budgetary approach is to separate capital from current revenues and expenditures and relax fiscal constraints by allowing governments to finance capital expenditures with debt, as suggested by the golden rule approach to capital funding.