The Innovation Channel of Fiscal Space: Evidence from OECD Countries

Francesco Tomasone, Silvia Calò and Robert Krämer

No 258, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper examines the effects of shrinking fiscal space and the resulting fiscal consolidation on private and public expenditure in research and development (R&D). In a sample of OECD countries, we find R&D expenditure strongly influenced by the available fiscal space, with this relationship being particularly pronounced in less innovative countries. To better understand this relationship, we empirically test a potential transmission channel: fiscal consolidation. Our analysis shows that the 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. Finally, 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.

JEL-codes: E62 H50 H63 O38 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:258

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