The Innovation Channel of Fiscal Space: Evidence from OECD Countries

This paper explores how government fiscal room to manoeuvre —known as “fiscal space”— affects spending on research and development (R&D), which is crucial for innovation and long-term economic growth.

Highlights

• R&D expenditure is strongly influenced by the available fiscal space, with this relationship being particularly pronounced in less innovative countries. 
• Spending cuts in public allocations to R&D driven by fiscal adjustments are more pronounced in less innovative countries, suggesting the presence of a doom loop between consolidations and low domestic R&D intensity. 
• The composition of consolidations matters: tax-based adjustments have a significantly negative impact on total domestic R&D spending, primarily due to the sharp contraction they induce in business R&D investments.

Information and identifiers

Discussion Paper 258. July 2026. Brussels. PDF. 44pp. Tab. Graph. Bibliogr. Free.

KC-01-26-071-EN-N (online) 
ISBN 978-92-68-42150-5 (online)   
ISSN 2443-8022 (online) 
doi:10.2765/1307571 
JEL classification: E62, H50, H63, O38.

Disclaimer

European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this paper are solely those of the author(s) and should not be considered as representative of the European Commission’s official position.