Relevance of pay-back effects in public investment appraisal

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Abstract
The pay-back argument is often used in a plea for increasing public expenditures in labour-intensive sectors (such as building/construction), which are suffering from high unemployment rates. The argument rests on the assumption that the rise in government expenditures can be financed (at least in the long run) from the savings in social security (notably unemployment) benefits. This argument is critically reviewed in this paper. A distinction is made between pay-back effects at the general macro-economic level and those at the individual project level. It is argued that at the macro level the argument may have some validity, but that at the micro level it can hardly be used to discriminate between individual projects due to lack of quantitative insight into all (direct and indirect, positive and negative) payback effects.

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