Title: The innovation channel of fiscal space
Summary: This paper examines the effects of shrinking fiscal space and the resulting fiscal consolidation on private and public expenditure in R&D.
Authors: Francesco Tomasone (Sapienza University of Rome), Silvia Calò (ESM), Robert Kraemer (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 further explore 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.
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
Keywords: Fiscal consolidations, R&D
JEL codes: E62, H50, H63, O38