How to boost economic output with the supply-side approach

The evolution of potential output is crucial for long-term economic growth and has been a focus of economic policy. Reports by the Office for Budget Responsibility and Mario Draghi highlight the importance of public investment in infrastructure to boost competitiveness. Europe lags behind the US in creating large companies and investment as a share of GDP has declined. In the UK, public sector investment in infrastructure is low compared to global standards. Challenges include high costs and lengthy delays in major projects. Despite the importance of public investment, there is skepticism among voters. The OBR report emphasizes the impact of public investment on potential economic output and productivity. The economists analyze lags and timescales of contested infrastructure projects to predict impacts with various elasticities, concluding that a 1% increase in public investment could boost potential output by almost 0.5% after five years and around 2.5% in the long run. While not every public project is economically viable, the report emphasizes the positive internal rates of return, highlighting the need for increased public-sector investment to drive national growth and productivity.

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