Читать книгу EIB Investment Report 2020/2021 - Группа авторов - Страница 37

Government investment showed a mild upward trend in the European Union before the coronavirus outbreak. As a share of GDP, government investment reached 3% in 2019 (from 2.8% in 2016, the lowest level in 25 years) compared with an average of 3.2% for 1995 to 2016. It increased in Western and Northern Europe and in Central and Eastern Europe, but continued to decline slightly in Southern Europe. In 2019, investment spending came to 4.2% of GDP in Central and Eastern Europe, 3.1% in Western and Northern Europe and 2.2% in Southern Europe. The low level of investment was fairly consistent across Southern Europe, without major differences between countries, except Malta, which had a much higher share at 3.8%.[13] The differences among countries in the other regions is much greater, ranging from 3.1% in Lithuania to 6% in Hungary in Central and Eastern Europe, and from 2.3% in Ireland to 4.9% in Sweden for Western and Northern Europe.

In the last three years, capital transfers and investment have fallen below the average witnessed in 1995-2016. Interest spending registered a larger drop, while primary current expenditure is higher than its historical average. This suggests that the wide reduction in the debt service burden has not translated into support for capital spending. The balance between current and capital expenditure, particularly in Southern Europe, has tilted in favour of current spending.

Figure 24

Government investment as a share of GDP

Source: European Commission’s AMECO database, top panel country groups’ time series, bottom panel 2019 vs. 1995-2016 average.

Figure 25

Capital expenditure, primary current expenditure and interest

Source: European Commission’s AMECO database.

The COVID-19 crisis caused current spending to rise notably, which was reflected in the budget plans of EU Member States. EU members first submitted (at the end of April 2020) streamlined versions of their Stability and Convergence Programmes, including a first assessment of the pandemic’s impact on policies and public accounts. Then, around mid-October, members of the euro area submitted their draft budget plans for 2021. Combining these two sources with the European Commission’s autumn economic forecast allows us to assess the pandemic’s impact on fiscal policy.

Current expenditure increased substantially in 2020. Table 1a shows that revenues, as a share of GDP, are roughly constant, meaning that they are declining in line with the contraction in GDP. Total expenditure, on the contrary, is increasing as a share of GDP because of the emergency measures taken by Member States, the vast majority of which go under the heading of primary current expenditure.[14] This category of spending is growing significantly as a share of GDP (from 41.2% to 48.4%) and compared with the 2019 level (up 10.8%). The bulk of the spending is for unemployment benefits and subsidies to support incomes. The jump in current expenditure will be partially re-absorbed in 2021, when its share of GDP should decline to 45.9%. Current spending is also expected to dip in 2021, by 0.2%.

Table 1

Government budgets as a share of GDP, nominal growth rates year-on-year

Source: European Commission’s AMECO database, European Commission’s autumn forecasts.

The European Commission’s autumn economic forecast suggests notable growth in public investment in the aftermath of the COVID-19 crisis. Investment’s share of GDP is projected to increase to 3.4% in 2020, up from 3% in 2019. Compared to 2019, the amount spent on government investment will rise by 5.2% in nominal terms. The levels are not homogeneous across regions. In 2020, investment growth will be a little weaker in Western and Northern Europe (4.5% in 2020) and stronger in Southern Europe (7.5%) while in Central and Eastern Europe, public investment will grow by 5.6%. Government investment’s share of GDP will increase in all three regions. In 2021, the share will continue to increase in Southern Europe (2.7%), with nominal growth of 6.8%. The share will stabilise at 3.4% in Western and Northern Europe and at 4.7% in Central and Eastern Europe.

Governments are planning more investment to support the recovery, particularly in 2021. The expenditure targets included in the draft budget plans for 2021 submitted by euro area members suggest a more expansionary path, with a more prominent role for government investment. The largest differences between these plans and the European Commission’s forecasts of the target share of GDP for government investment are for Greece (6.6% vs. 4.1%), Estonia (6.7% vs. 5.9%), Italy (3.4% vs. 2.7%), Slovenia (6.24% vs. 5.8%), Spain (2.8% vs. 2.4%) and France (4.2% vs. 3.9%). If achieved, these targets will imply notably stronger investment growth, particularly in Southern Europe. For example, the Greek draft budget plan foresees an increase in the share of investment in GDP from 2.2% in 2019 to 3.6% in 2020 and 6.6% in 2021. Those increases will bring the share of investment in GDP in Southern Europe almost in line with the EU average (3.3% vs. 3.6%) in 2021.

Table 2

Government investment: Draft budget plans and European Commission’s autumn economic forecast

Source: European Commission’s autumn economic forecast and euro area members’ draft budget plans.

The prospect of activating the Recovery and Resilience Facility and the Multiannual Financial Framework (MFF) for the 2021-2027 budget period is enabling Member States to focus on capital expenditure in their 2021 budgets. The European Union’s recovery programme allows for a longer-term perspective. Without it, the marked increase in public deficits may have reduced governments’ ability to support the recovery by spending on investment. This is particularly evident when comparing the draft budget plan submitted in October with the European Commission’s spring forecasts. Aggregating the numbers shows that the planned increase in investment in 2021 is EUR 40 billion higher, with a share of GDP that is around 0.3% higher than in the forecast.[15] Many draft budget plans include references to the RRF, a central pillar of the NextGenerationEU recovery programme, as a key factor in the medium term.

Some Member States have discussed or already approved plans that aim to support the economy amid the COVID-19 crisis. Early June, Germany approved a large package worth EUR 52.8 billion for 2020-2021 that mainly consists of government investment. Part of the package includes EUR 15 billion supporting e-mobility, EUR 11 billion for artificial intelligence, communication technologies and networks, and EUR 15.3 billion for the digitalisation of public administration and local authorities. Investment in hydrogen technology (EUR 9 billion) and R&D (EUR 2.3 billion) is also planned. France has designed a support package that includes EUR 4.6 billion for the aerospace industry, including military and civil security purchases, along with EUR 8 billion for the automotive sector and its supply chain. The Spanish government set EUR 1 billion aside for strengthening science, technology and innovation and established a regional fund for investments in education (EUR 2 billion) in addition to EUR 9 billion for healthcare spending. As part of their extraordinary measures, many countries allocated funds to shoring up the automotive industry, which remains the easiest way to stimulate demand and activate a large and mainly local production chain. This effort involves incentives for renewing vehicle fleets, favouring low-emission vehicles. The automotive initiative includes the European Union’s largest Member States, namely France, Spain, Germany and Italy.

In 2020-2021, a substantial increase in capital transfers will appear on many public sector balance sheets. Capital spending, which includes investment and capital transfers, is projected to show a massive increase in 2020. Many governments have allocated considerable resources to shore up firms. Examples include the hardest-hit sectors, such as air transport, along with innovative firms or start-ups, firms in the utilities sector or, in general, “strategic” companies as shown in Table 3. Not all of these funds will necessarily be used and, even if they are, the equity injections by governments will likely be only temporary as the shareholdings will be sold to private investors at a later date.

Table 3

Programmes providing equity support for large, strategic firms or small businesses/startups

	Large or strategic firms	Small businesses
Germany	100	2
France	20	3.9
Spain	10
Denmark	1.3
Ireland	2
Italy	45	2

Source: Bruegel, Bank of Spain, IMF Policy Tracker[16].

Figure 26

Capital expenditure as a share of primary current expenditure, 2020-2021 change relative to 2017-2019 (percentage points)

Source: European Commission’s AMECO database and EIB staff calculations.

Policymakers should keep in mind that historically, government investment has tended to decline substantially following a surprise contraction in GDP (Box A). We argue that this time, the outcome should be different. As a share of GDP, government investment has approached a 25-year low following several years of fiscal consolidation in the wake of the global financial crisis. Infrastructure needs in many European regions have been increasing after years of underinvestment (EIB, 2017; EIB, 2018). Furthermore, the biggest challenges for the future of the European Union – climate change and digitalisation – require even more government investment. At the same time, current ultra-low interest rates are allowing many governments to borrow very cheaply, easing fiscal constraints. Recent high estimates of the impact of government investment on GDP lend further support for an increase (International Monetary Fund (IMF), 2020).

Fiscal sustainability issues, however, require a careful balance between taking on new debt and re-orienting government spending from current to capital expenditure. Low borrowing costs could quickly increase and force fiscal consolidation (Lian, Presbitero and Wiriadinata, 2020). That said, sovereign borrowing costs are historically very low as a result of central-bank purchases of sovereign debt in most EU countries. Theoretically, governments could lock in low interest rates for their bonds if they extended the maturity of their borrowing. However, investor demand for very long-term securities may be low.[17] In addition, debt management offices tend to caution against varying long-established issuance patterns.[18]

Box A

Government investment following recessions and fiscal consolidation

Contingent liabilities and fiscal deficits have climbed rapidly in most EU countries as economic activity collapsed and government support programmes were rolled out. In its 2020 spring forecast, the European Commission estimated that government debt to GDP in the European Union will likely increase by 15 percentage points to 94%. The increase varies substantially across Member States, from 3.4 percentage points in Luxembourg, the country with the third-lowest government debt, to 26.6 percentage points in Greece, the country with the highest (Figure A.1).

Figure A.1

Increase in government debt, European Union in 2020

Source: AMECO database.

Once the health and economic crises subside, countries will need to rebuild fiscal reserves to deal with future challenges, in particular ageing, structural change, and, in the longer term, climate change (see for instance European Commission, 2020).

Cuts to government investment played an outsized role in previous rounds of fiscal consolidation. Fiscal efforts often entailed a mix in spending cuts and increases in revenues, with increases in revenues playing a bigger part in large-scale consolidations (OECD, 2011). In many countries, belt-tightening involved significant cuts to the largest expenditure items, such as public sector wages and social security spending. However, some expenditures suffered disproportionately. Government investment was sometimes cut vigorously, even though it generally comprises only about 5% of spending. For example, Blöchliger, Song and Sutherland (2012) find that government investment spending as a share of GDP was cut in half, on average, during 13 major rounds of consolidation over 1981-2000. The pressure on investment could be because those cuts encountered less political resistance than reductions in entitlements (for instance, Blöchliger et al., 2012).

In recent work, we find that the decline in investment following fiscal consolidation was not only large, but also long-lasting. We identify fiscal consolidation, following Alesina and Ardagna (2013), by sustained improvements of the cyclically adjusted primary balance. The estimation strategy is similar to Rioja, Rios-Avila and Valev (2014): the deviation from the trend in the government investment rate is regressed on indicator variables, one for each year since the start of the fiscal consolidation, and a number of relevant controls. The cumulative sum of the coefficients on these indicator variables form the impulse response of government investment to the fiscal consolidation (Figure A.2). Results illustrate the substantial and persistent effects of fiscal consolidation on government investment. After ten years, the cumulative decline in government investment is about 2 percentage points of GDP. Put differently, ten years after the start of a round of fiscal consolidation, government investment remains, on average, 0.2 percentage points of GDP below the historic trend.

Figure A.2

Deviation of government investment from trend (cumulative percentage points of GDP)

Source: EIB staff calculations.

Government investment also fluctuates significantly more than current expenditure over the business cycle, independently of fiscal consolidation. This suggests that governments find it easier to adjust public investment than current expenditure. To explore the effects of these changes, we have regressed changes in government investment on surprise declines in GDP, using local projections (Jordà, 2005) to estimate the impulse response. The results suggest that a 1% surprise drop in GDP reduces government investment cumulatively by about 3-4% over the following few years (Figure A.3).

Figure A.3

Cumulative response of government investment after a 1% surprise decline in GDP

Source: EIB staff calculations.

Given the current economic environment, our results suggest that government investment could drop substantially if past fiscal consolidation patterns prevail. For the euro area, for example, the surprise decline in GDP is about 8 percentage points this year, suggesting that government investment could fall by more than a quarter over the next couple of years. Admittedly, the contraction may be smaller. We measure growth surprise as the two-year ahead forecast error in the IMF’s World Economic Outlook. Relative to forecasts made in 2019, GDP growth is likely to be surprisingly large in 2021. However, according to our analysis, the response of public investment to surprise increases in GDP is smaller, and statistically far less significant, compared to the response following a surprise drop in GDP.

Current forecasts predict that government investment will increase in most regions, at least in nominal terms, despite the pandemic shock (Table 3, main text). This would mark a welcome break with the past. Cutting government investment is not an option. Government investment as a share of GDP approached a 25-year low in most EU countries (EIB, 2019). Public infrastructure needs modernising in many countries (EIB, 2017 and EIB, 2018). Digitalisation and dealing with climate change also require large public investments over the coming decades.