Indeed, in the short term, the additional spending pressures associated with an increase in public investment require offsetting balancing fiscal measures if the economy is operating in the neighbourhood of full capacity. Otherwise, there is the prospect of short-term crowding out, with exporting sectors especially affected by the loss in competitiveness associated with a deficit-financed surge in public investment (Hickey at al 2018).
In contrast, a fiscally-neutral increase in public investment would deliver the long-term gains without inducing short-term overheating. Conclusions Successful macro-financial policymaking requires a dual focus on managing cyclical volatility and addressing the strategic challenges that ultimately determine long-term economic and social outcomes. In relation to the former, both macroprudential and fiscal policies can contribute to cyclical stabilisation.