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An Examination of the Effects of an Investment Stimulus

An Examination of the Effects of an Investment Stimulus

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Summary

An investment stimulus is regularly proposed as a response to the recent dramatic fall in domestic demand in the Irish economy. In contrast, critics of an investment stimulus cite the high import share in the Irish economy as a reason for why the benefits of a stimulus would leak from the Irish economy.


Using the HERMIN model, which was originally developed to measure the effects of European Cohesion Funds, this paper examines what effect an investment stimulus would have on employment, GDP, and net exports. The research finds that an investment stimulus of €1bn for one year would create approximately 16,750 short term jobs and between 675 and 850 long term sustainable jobs. The GDP multiplier in the first year of a stimulus is 1.6. Crowding out effects are reduced due to the high level of unemployment and the direct effects of an investment stimulus are increased by the fall in construction prices. Though imports rise during the construction phase of a stimulus, this is short lived, and there is a long term increase in exports due to enhanced productivity and competitiveness. Due to greater tax revenues resulting from higher GDP, the up-front net cost of a €1bn investment is €575 million. This is found to be self-financing, as the long term increase in tax revenue more than offsets the interest payments on the initial capital outlay.


The paper compares these findings to other previously published research. The findings are consistent with previous research, in showing a positive effect of government investment on the Irish economy.

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