UK government investment boosts growth more than private sector, study finds
UK government investment is extremely efficient at boosting growth in the economy, despite results varying wildly across the globe, a new study has claimed.
Every additional pound the government invests in the UK economy turns into £9.30 of additional output after 20 years, according to research from the University of Lisbon.
This return, which averages 11.8 per cent per year, makes the UK the most effective investor of public money out of all 18 countries studied, which includes the US, Germany, and France.
In comparison, UK private sector investment only returned a multiple of 1.89 over 20 years, the study found.
The paper from researchers António Afonso, Jorge Caiado, and Omar Kanaan assessed whether higher investment levels drive economic growth and the interaction between public and private investing.
Investment does not cover day-to-day government spending, such as welfare payments, but specifically investing into areas such as infrastructure, education and health.
Public and private investment
While public investing could complement money spent by the private sector by providing infrastructure that reduces costs and increases private sector efficiency, it could also actually have negative growth effects.
“The direct return on additional public investment is more likely to be negative than in the case of private investments,” explained Panmure Liberum analyst Joachim Klement.
“This is because public investments are often made in unprofitable areas to attract private capital or boost nascent industries.”
The average total rate of return for money spent by the private sector across all countries was calculated as 1.52, meaning that £1 invested turned into £1.52 of GDP in 20 years time.
Meanwhile, public investing came in higher on average, with a return rate of 1.9, though this differed significantly across the regions studied.
“Private investment consistently stimulates growth, while public investment’s impact varies by country,” the paper found.
“Private investment consistently demonstrated positive effects on economic growth across all countries, underscoring its vital role in national economic development.”
A significant underperformer for public spending included the US, which actually saw a negative return on cash invested by the government.
“US public investment simply isn’t geared towards attracting private investments and boosting economic output because most of the economy is fully privatised leaving only areas that are intrinsically loss-making to the government,” explained Klement.
However, the study failed to elaborate on why the UK was so effective at making public money work, and whether other countries should be looking to emulate British government spending.
“The results of this study are clear: Public investments work and are remarkably efficient in boosting long-term growth,” concluded Klement.