Crowding-in and Crowding-out Effects of Public Investments in Poland and Portugal: a Comparative Study

Abstract

The article aims to analyse on a comparative basis the effects of public investment spending on the economies of Poland and Portugal in the period 1996–2017. In the economic theory, there are divergent opinions as to the impact of expansionary fiscal policy on economic growth. The direct and indirect impact of the increasing government spending on the economy is one of the key questions in assessing the effectiveness of government spending policy. In the empirical analysis several regression models were used to examine major relationships that are essential in the assessment of the macroeconomic effects of public spending in both countries. The estimation results for Poland point at the presence of a positive effect of public investments on the volume of private sector’s investment outlays and gross domestic product. Another finding is the absence of negative effects of public investments on economic competitiveness measured by the real exchange rate. This confirms the existence of complementarity between private and public investment and excludes their substitutability. On the other hand, in case of Portugal, there is no evidence of the positive macroeconomic influence of public investment spending throughout the analysed period. This may indicate that the initial stimulating effect of the inflow of EU funds combined with domestic public investment outlays, which was observed in earlier years, tended to disappear and transformed into crowding-out of private investmens by public investments. However, this result can also be connected with the economic stagnation resulting from the 2008+ crisis and the later recession when public outlays were not able to activate the private companies enough. Financial costs represented by nominal interest rate played also an important role in shaping private investment in both Poland and Portugal and in the output evolution.