GOVERNMENT CAPITAL FORMATION - EXPLAINING THE DECLINE

This paper examines whether various hypotheses put forward to explain the downward trends in government capital spending are supported by th e data. Using panel data for 22 OECD countries for 1980-1992, various hypotheses are tested in a model. The authors find support for three h ypotheses: (1) capital spending is reduced during periods of fiscal st ringency, since this category of government spending is politically an easier target for cuts than other spending categories; (2) myopic gov ernments will cut investment spending more than governments which have a longer policy horizon; (3) private investment influences government investment spending, because both types of investment are complementa ry.