June 1, 2010

Public investments and debt policy

In view of the different pattern of costs and benefits, public investment might affect the welfare of the current and future generations differently. In this memo, we develop and apply a simple framework to explore the effects of public investment on the intergenerational welfare distribution.

We consider three types of public investment: investment in public capital (or infrastructure); investment in education and investment in the environment (the latter is restricted to climate change policies).

For each of the investment types we address three questions.

First, what are the economic and distributional effects when the investment is financed by an uniform increase in taxes?

Second, what are the consequences of debt financing for the intergenerational distribution?

Third, how is the intergenerational distribution affected if government transfers are linked to the wage growth arising from higher public investments?