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Opinion
March 9, 2018 www.intellinews.com I Page 27
CEE fiscal short- termism threatens infrastructure investment
Otilia Dhand of Teneo Intelligence
While all governments of Central and Eastern Europe (CEE) declare a goal of improving infra- structure, levels of investment have actually been declining over the past decade. Political populism has led to short-termism in fiscal policy, as cur- rent government expenditure on public sector wages and social support programmes is increas- ing at the expense of long-term investment. Lack of investment has slowed down the convergence in infrastructure quality towards the EU aver-
age and may constrain medium-term economic growth. This prospect is aggravated by the emerg- ing debate on possible linking of future EU cohe- sion funding to EU values, the very topic of the clash between Brussels and more than one CEE capital in the past two years.
A report of the European Investment Bank (EIB) from November last year observed that even as European economies started to grow after the cri- sis years, infrastructure investment has levelled off at 80% of pre-crisis investment rates. The most significant drop was in the transport sector, where, crucially, CEE countries have a lot to catch up with to converge to the EU average. In fact, the countries that have the lowest levels of infrastruc- ture quality appear to be the most affected by the fall in infrastructure investments and their con- vergence process has slowed down significantly.
The EIB report documented that the key driver of the decrease in infrastructure spending has been the withdrawal of governments from infra- structure activities, as they seek to achieve bal-
The problem may be compounded, if the next multi-year EU budget for 2021-27 period brings a reduction in funding for infrastructure.
anced budgets and, at the same time, shift public spending away from gross capital formation to- wards current expenditure. While cyclical factors partially explain this shift, political preferences driven by short-term consideration appear to be a major factor behind it.
In the aftermath of economic crisis and auster- ity in 2011-12, governments cut spending to meet convergence criteria towards a long-term goal
of balanced budgets as required under the 2012 European Fiscal Compact. While the investment appeared to be rebounding in 2014-15, this spike in gross capital formation was caused by the governments’ race to meet the 31 December 2015 deadline to draw the last remaining funding from the European Union’s 2007-2013 budget period.
A sharp drop, well below the levels recorded in the austerity period, followed in 2016 and dis- pelled the myth of rebounding government in- vestment. The key driver behind this drop is the combination of growing short-termism in political decision-making and the constraint of conver- gence towards balance budgets required under the fiscal compact.
Populist parties, which claim to champion the interests of common people against the corrupt political and business elites, have come to power in Poland and Hungary in recent years. Given the positioning of populist leaders as the champions of the poor and those left behind by the transition to the globalised market economy in the past two decades, these parties tend to prioritise social