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Making the Most of Public Investment in a Tight Fiscal Environment

Multi-level Governance Lessons from the Crisis

image of Making the Most of Public Investment in a Tight Fiscal Environment

How to make the most of public investment? This question is critical in today’s tight fiscal environment. Given that sub-national governments in OECD countries carry out more than two thirds of total capital investment, they have played a key role in executing national stimulus packages during the global crisis. The effectiveness of recovery strategies based on public investment thus depends largely on the arrangements between levels of government to design and implement the investment mix.  This report provides an overview of challenges met in the recovery and highlights good practices and lessons learned, focusing on eight country cases: Australia, Canada, France, Germany, Korea, Spain, Sweden and the United States. As stimulus packages are being phased out since 2010, many countries have moved toward fiscal consolidation and targeted public investment as an adjustment variable. Co-ordination between levels of government was essential to implement recovery measures, and it is equally important to better prioritise reduced public investment and make the most of it for sustainable growth.

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France

Due to a sounder banking system, a less-leveraged corporate sector and strong public finances, and significant monetary and fiscal policy stimulus, the Canadian economy weathered the global financial crisis relatively well. The robustness of the Canadian banking sector reflected a conservative risk culture reinforced by effective prudential supervision. Canadian banks were better capitalised and less leveraged than their international peers and mainly engaged in retail banking as opposed to investment activities, all of which are characteristics shared by banks that emerged relatively unscathed elsewhere in the OECD. Even though official liquidity support was available, Canadian banks maintained their ability to raise capital from the markets and did not tap available public borrowing guarantees or require expansion of deposit insurance limits (OECD, 2010).

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