Fiscal Policy and Public Investment in the New EU Member States

This paper looks at fiscal adjustment and public investment issues in European New Member Stase (NMS), and the role of EU support and PPPs to develop infrastructure. In particular, the paper aims to address three specific issues: • First, what does the evidence suggest regarding the impact of fiscal adjustment on public investment levels? • Second, where do NMS stand with respect to infrastructure indicators and what could be the role of EU funds in providing resources for needed investment? • Third, how could NMS improve the institutional environment for PPPs to capitalize on efficiency gains and manage fiscal risks in an effective way? NMS face important challenges to upgrade infrastructure. The paper suggests that the experience with fiscal adjustment and public investment has been fairly mixed. Some countries have resorted to investment cuts to consolidate fiscal positions, while others have been more successful in both accommodating higher levels of investments and reducing fiscal imbalances. Still, to support growth and development, additional investment is needed across the region, particularly in productive infrastructure, even in a context of tight budgets. In this regard, new available financing presents both opportunities and challenges, requiring improvements in the institutional framework for investment and PPPs. In the case of EU funds, absorbing the substantial additional resources under the new financial perspective will demand important efforts to reallocate expenditures and to step up absorptive capacity. Similarly, while PPPs provide a promising route for channeling more resources into infrastructure investment, strengthening the institutional framework for PPPs and limiting incentives to simply move investment off budget is crucial to deliver on the expected benefits and manage the fiscal risks that come from private participation in infrastructure.