The future ratio: A new metric for forward-looking fiscal policy in Europe

This study introduces the Future Ratio, a novel indicator designed to assess the future orientation of public expenditure in EU Member States. While traditional investment ratios focus primarily on tangible capital formation, the Future Ratio encompasses a broader concept of capital, including human capital, technical knowledge, natural capital, and growth-relevant infrastructure. By capturing expenditures that strengthen long-term capacities and performance, the Future Ratio provides a more nuanced measure of how fiscal policy serves the interests of future generations. Using Eurostat's COFOG data, we calculate the Future Ratio for all EU countries from 2001 to 2023. A systematic weighting algorithm classifies spending categories based on well-defined criteria, allowing differentiation between present-oriented and future-oriented expenditures. This approach accommodates the spectrum of future orientation across various policy areas while maintaining comparability across countries and over time. Our findings reveal both positive and negative trends. After 2015, average future-oriented spending in the EU increased, with temporary setbacks during the COVID-19 pandemic, suggesting a potential learning effect from the euro area debt crisis. Cross-country comparisons highlight significant heterogeneity: Northern and Eastern European countries generally exhibit higher Future Ratios, whereas Southern European countries, along with major economies such as Germany and France, display only average or below-average levels. Correlation analyses indicate that high debt levels strongly constrain future-oriented spending, while factors such as compliance with Stability and Growth Pact rules and performance-based budgeting are moderately associated with higher Future Ratios. Conversely, demographic structure, education levels, voter turnout, and procedural fiscal rules show little systematic relationship. These results underscore the critical role of fiscal space in enabling governments to invest in the future. High-debt countries appear trapped in a "bad equilibrium," where debt servicing crowds out investment in long-term priorities. Overall, the Future Ratio provides a tool for national and European policymakers and researchers to monitor the alignment of government expenditure with long-term societal challenges, offering a complementary perspective to conventional fiscal indicators.