Growth and welfare effects of changes in the composition of the Brazilian public investment

Abstract

The objective of this paper is to build a general equilibrium model, in order to perform counterfactual simulations of recent increases in public investment in Brazil, besides simulations of alternative policies, in order to ascertain effects on macroeconomic aggregates, as well as social welfare. The simulations consist of changing the shares of the public administration investments or infrastructure investments (53%), which are supposed to be complementary of the private investments, and the state enterprises investments (47%), which are supposed to be substitute of the private investments. Regarding the basic scenario, a counterfactual simulation that changes the share of public administration investments from 53% to 80% would provide a long-term economic growth rate of the product of 9.5% and a welfare gain of 8%, according to the measure proposed in the paper. Additionally, instead of the comparison between only the steady states proposed in this contrafactual exercise, in the case of a hypothetical policy where this recomposition of investments were effectively implemented today, the welfare gains reaches 1.35%, indicating that despite a onerous transition, the welfare net gain of this eventual policy would still be big enough for the aggregate economy, justifying its implementation.