Investment’s share of government spending in the EU14 Since 1995 – convergence or divergence, and why?

Abstract

With a renewed focus on government investment to address infrastructural, defence and decarbonisation objectives in the EU now arising, the behaviour of its share of government spending across the EU14 countries between 1995 and 2023 is assessed. Greater convergence in that investment ratio has occurred over time, mainly reflecting a decline in periphery member states’ ratios during the 2009–2012 economic crisis. Econometric analysis indicates both cyclical and fiscal variables affecting ratio values, with higher debt ratios associated with relatively lower capital expenditure. With new EU fiscal rules, adopted in April 2024, imposing constraints on government expenditure growth, there is a danger that public capital formation could be constrained relative to identified needs.