Reports 2013/18

Effects in the Norwegian economy of increased transport investments

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This study provides quantitative evidence for how increased public transport invest¬ment affects the "pressure" of the economy. It is assumed that the public demand in other areas is not reduced, so that the increase in investments implies an expansionary shift in fiscal policy stance. Simulations by Statistic Norways macro¬economic model MODAG generates a reference path for the Norwegian economy, where the level of public transport investments can be associated with the "current level", as a point of departure. On this basis, the effects on the economy of four different scenarios are studied. All of the scenarios imply permanent increases in public transport investments, the same increase at constant prices compared to the level in the baseline scenario in the whole of the simulation period. The impulses corresponds to increases from 0.2 to 2.0 percentage points Mainland GDP in 2013. The calculations are made given two different assumptions about the pressure in the economy in the baseline scenario, with unemployment rates of 2.5 and 4.0 percent respectively.

The smallest increase is 4.7 billion in 2013-prices (0.20 percent of Mainland GDP in 2013), increasing Mainland GDP in the first year by 0.14 percent. In the sixth year, the effect is 0.20 percent on the basis of a baseline scenario with the low unemployment rate (2.5 percent) and 0.17 on the basis of a situation with the higher unemployment rate of 4.0 percent. The effect through extra strong increase in household consumption from a stronger effect on wages on the basis of low unemployment base line scenario, more than outweigh the extra strong effect of the reduction in net exports from the deterioration in cost competitiveness. The unemploy¬ment rate fell by 0.02 percentage points. The wage level is then increased by 0.19 percent (initially high pressure) and 0.13 percent (initially low pressure). Net exports are reduced by 0.17 and 0.14 percentage points as a share of Mainland GDP. The accompanied effects of money market rates are 0.06 percentage points, regardless of the baseline.

The effects of the various scenarios are close to proportional to the size of the impulses. The largest increase in transport investments is close to 10 times bigger than the smallest increase and only leads to a little more than 10 times larger effects. With a particularly strong increase in railway investments so that the total impulse reaches 45.5 billion in 2013 values GDP in the first year increases by 1.44 percent while the unemployment rate decreased by about 0.3 percentage points. In the sixth year, the effect reaches 2.10 per cent on the basis of a baseline scenario with the low unemployment rate and 1.85 percent on the basis of a situation with the higher unemployment. The decline in the unemployment rate fell to just under 0.2 percentage points. The wage level is then increased by 2.00 percent and 1.35 percent, while the money market rate is increased by 0.60 percentage points and 0.55 percentage points respectively. The effect is strongest on the basis of the baseline scenario with the lowest unemployment.

After 20 years, GDP effects are slightly reduced, to 1.96 on the basis of low unemployment scenario and 1.81 on high. Based on the baseline scenario with high pressure, money market rates continue to increase and becomes in 2032 0.90 percentage point higher than in the base line, while the increase with the higher initial unemployment is dropped to 0.42 percentage points. Wages have increased with respectively 6.49 and 3.49 percent. Net exports were then decreased corresponding respectively to 2.35 and 1.45 percentage points of Mainland GDP.

In the short- and medium-term perspective, pressure effects may be considered as relatively moderate, even with the largest rise in transport investment. If one is initially concerned that economic pressures are too high, which would be the case with a baseline of only 2.5 percent unemployment, any increase in pressure could be perceived as high and that the situation is worsened.

One can also do similar analyzes of many other objectives, and get the same result: that they singly will increase the pressure in the economy quite modest. The sum of them though, will mean a sharp increase in pressure in the economy. If one is initially concerned long-term public finances, the measure in isolation is also a step in the wrong direction.

It must be emphasized that these simulations are uncertain. The model is a macro model that can’t capture all bottleneck problems related to strong expansion in certain specific sectors and may be also in specific regions.

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