In this paper, we investigate the link between public investment and output in the United
Kingdom. We estimate a medium-scale neoclassical growth model in order to gauge the
output elasticity of public capital for the UK economy, finding a posterior mean of 0.112 for
the elasticity, indicating that public capital has a positive and economically meaningful
effect on output in the UK. Using the results from the estimation exercise, we find that the
welfare-maximising output share of public investment is between 5.9 and 6.1 per cent,
above the historical average of around 3.5 per cent. This finding, though interpretable as a
reasonable upper bound, suggests that the United Kingdom has scope to benefit from an
increase in productive public investment. Our results suggest that further work in
estimation of the output elasticity of public capital may be the most fruitful avenue for
future research.
Authors Paula Bejarano Carbó, Benjamin Caswell, Stephen Millard