Public Investment and Fiscal Performance in the New EU Member States

In this paper, we analyse the dynamics of public investment and public finance in the new members of the European Union, and also how they were affected by changes in economic freedom and corruption. We find that improvements in economic freedom tend to be associated with increases in public investment, while reductions in corruption produce effects going in both directions. Similarly, we show that increases in public investment are often linked with decreases as well as increases in corruption. In terms of the public finances, we detect mostly improvements in debt when there is less economic regulation, while results for the deficit are less conclusive. On the other hand, improvements in the corruption environment are mostly associated with decreases in the deficit as well as debt. As a general rule that follows from our results, steps aimed at reducing corruption and the degree of economic regulation should lead towards improvements in the fiscal position of most of the new EU countries.