European Public Expenditure Lacks Future-Orientation
ResearchNew ZEW Indicator Shows: High Government Debt Is at the Expense of Future Generations
How future-oriented is public spending in Europe? A new study by ZEW Mannheim introduces the Future Ratio, a novel indicator designed to measure which share of public expenditure actually serves the interests of future generations – for example through investment in education, research, infrastructure or climate action. The study findings highlight significant differences between the EU Member States: Northern European and many Eastern European countries show a comparatively strong future-orientation in their investments. The Future Ratio in large economies such as Germany, France, Italy and Spain, however, ranks only average or below among EU countries. The correlation of high debt levels and low future-orientation of expenditure is particularly striking.
“Our analysis indicates that high debt levels are not associated with higher future-oriented investment – on the contrary: they massively restrict the financial scope for future-oriented spending,” explains Professor Friedrich Heinemann, head of the ZEW Research Unit “Corporate Taxation and Public Finance”. Dr. Albrecht Bohne, co-author of the study, adds: “Countries with lower debt ratios, such as Estonia, Lithuania or Sweden are much better positioned to invest in education, research and climate action. High-debt countries, on the other hand, are unable to balance debt reduction with investment needs, and this jeopardises their future viability.”
Debts slow down future investment
The study demonstrates that the higher a country's debt ratio, the lower the share for future-oriented expenditure. In countries with high debt levels, such as Greece, Italy and Spain, debt servicing and ongoing social spending are increasingly crowding out spending on long-term investment. By contrast, Member States with good fiscal discipline and strong records of compliance with the Stability and Growth Pact are more successful in allocating resources to future-oriented investment.
“High debt levels and high Future Ratios virtually exclude each other in Europe. In many countries there is a ‘bad equilibrium’ between debt burden and reform backlog”, emphasises Heinemann. “The Future Ratio can help governments make their budget structure more transparent and ensure that the interests of future generations are given greater weight again in fiscal policy.”
Northern and Eastern Europe invest more in the future
The average EU Future Ratio ranges between 21 and 24 per cent of overall government expenditure. The highest Future Ratios are exhibited by Switzerland (31 per cent), Lithuania (31 per cent), Estonia (30 per cent) and Sweden (30 per cent). Spain, France, Italy and Germany rank mid-field or lower, with values between 21 and 24 per cent. The difference is particularly pronounced between North and South on the one hand, and East and West on the other hand.
About the methodology
The primary data source for determining the Future Ratio is Eurostat data applying the COFOG (Classification of the Functions of Government) standard. With the new indicator, a differentiation is made for the first time between present-oriented and future-oriented expenditure categories. All expenditure was assessed and weighted on the basis of criteria such as relation to infrastructure, human capital formation, technological knowledge and contribution to natural capital. Taken together, this reveals a more comprehensive picture than would be the case with the tradition investment ratios, which are largely measures of the investment in physical assets. The indicator provides a tool for comparisons across countries and over time, complementing traditional fiscal indicators with the perspective of intergenerational justice.
