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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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Germany

Germany’s export-reliant economy has been hit hard by the global financial crisis. With the collapse of global demand real GDP fell by more than 6.5%1 from the beginning of 2008 until the second quarter of 2009 (OECD, 2010). The impact of the global financial crisis varied across regions. In 2008 GDP fell by 7.2% in the western Länder and by only 4.5% in the eastern Länder. The largest downturns occurred in those Länder with a large share in export-oriented manufacturing such as Baden-Württemberg. The crisis in the real economy, which was almost exclusively due to a decline in international trade, was accompanied by a severe banking crisis. German banks which had heavily invested in the US housing market required substantial government intervention.

English

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