Report | Budget, Taxes, and Public Investment

The Slow Growth Trap and the Public Investment Cure

Briefing Paper #34A

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This paper argues that the economy is stuck in a cycle of slow growth,
stagnant wages, inadequate productive investment and institutional trauma
resulting from the excesses of the 1980s. Public outlay as a strategy of increasing
investment and growth will backfire. A drastic cut in the public sector deficit will
only reduce demand without increasing productive investment. With slower growth,
deficit and debt will only loom larger relative to total output. The more likely way to
restore growth is to increase investment directly, through expanded public spending on
infrastructure, technology, procurement and related capital outlays. With
increased investment, the economy will again grow faster than the debt: public
deficits will gradually diminish relative to Gross National Product (GNP), and
past debt will become less of a relative burden.

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