Fiscal sustainability and the composition of government investment: The case of investment in road infrastructure

Road is the dominant mode of transport, and most investment in road infrastructure is undertaken by governments. Fiscal policy considerations exert therefore a profound impact on the size and quality of road networks. To understand the observed steep downtrends and volatility in road infrastructure investment in Europe since the financial crisis, this paper presents long- and shorter-term panel data analyses of their determinants. The results suggest that investment in road infrastructure is used by governments as an instrument to address fiscal debt sustainability concerns and to smooth out swings in government debt. Investment in road infrastructure also competes with other types of government investment, with a high negative elasticity with respect to investment in health and education. These results are striking in light of the high social cost of congestion, accidents, and other related negative externalities, but their welfare implications are not straight-forward to infer, including as higher road infrastructure investment may only have a limited and variable impact on congestion due to induced travel demand.

Automated summary

Road infrastructure investment is influenced by fiscal policy considerations, which is used by governments to address debt sustainability and smooth out debt volatility. It competes with investment in health and education, and its impact on congestion is limited and uncertain.