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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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Sweden

The decline in international demand hit Sweden’s export-oriented economy particularly hard. Swedish GDP decreased by 0.5% in the second half of 2008 and by 4.7% in 2009 before recovering in 2010. Swedish GDP was expected to grow by 2.6% in 2010, but with fiscal policy in neighbouring countries tightening, it is expected to slow down to 1.6% in 2011 (Economist Intelligence Unit, 2010). Unlike the Swedish banking crisis of the 1990’s, which had its origin in the collapse of domestic real estate prices, the recent crisis was mainly caused by increased exposure to international markets (Öberg, 2009). Swedish banks had accumulated substantial buffers during the profitable years preceding the crisis and thus weathered the financial turmoil relatively well compared to other countries. Nevertheless, they still experienced several funding problems and required liquidity assistance by the Swedish Government.

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