Public investment has been increasingly highlighted as an important policy tool because it stimulates the economy in the short run by increasing aggregate demand, while at the same time also improves the productive capacity of the economy in the long run, which increases aggregate supply. However, delivering public investment is often slow and subject to delays. These delays can be of a more procedural nature due to the delays in planning, but also technical, as it takes a long time to construct large projects that are typically done by governments.

We investigate the effects of these two frictions that cause delays in delivering public investment. The first friction, which we call a planning delay or a time-to-plan, is the period of time between the moment a public investment is announced and the time it starts being carried out. No material spending occurs during this time and therefore also no material stimulus to the economy other than information that something will be constructed and put to productive use in the future. The second friction, which we call construction delay or time-to-build, is the time that passes from the moment construction starts to when the project is delivered and put to use. During this time, there is an active demand stimulus to the economy provided by the government purchasing goods and services needed for government investment. Similarly as with the planning delay, this is accompanied by the information that, when finished, the investment project will be put to productive use in the future.

To assess the effects of delays related to public investment, we conduct a comparative analysis in two classes of models of a small open economy in a monetary union, calibrated to Ireland. One model features a standard labour market with sticky wages, while the other model is otherwise identical, but features search frictions and unemployment. We find that in both classes of models a permanent increase in (productive) public investment always leads to an increase in output, consumption, and exports in the long run. Delays in delivering public investment always result in lower welfare, even when the long-run increase in consumption and other variables is the same.

Moreover, we find that planing delays can make the stabilisation of business cycles more difficult. Planning delays can result in output decreasing in the short run, so that during a recession an announcement of an increase in public investment, if not followed quickly by implementation, can exacerbate the downturn. Moreover, if the eventual stimulus in the future coincides with a future boom in the business cycle, this may exacerbate the boom and overheat the economy.