Current public budgets cannot meet today’s overwhelming investment needs in climate transition, defence, security modernisation, digital infrastructure and demographic adaptation. Traditional fiscal systems, focused mainly on spending controls, annual budgets and deficit targets, are insufficient.
Advanced economies require a new fiscal framework that prioritises public investment and long-term value creation to achieve lasting economic growth. Focusing on how governments can spend public money more efficiently is essential to future fiscal competitiveness.
A new report by OMFIF and EY puts forward a framework for fiscal effectiveness, focusing on public administration and direct service provision as the state’s production function. This is the fourth instalment of the OMFIF-EY ‘The future of public money’ project.
Reframing public spending
Fiscal competitiveness is related to the productivity of public investment. It refers to how effectively fiscal policies attract investment, support growth and ensure public service delivery. When used for production rather than consumption, public money can lift growth, expand revenues and strengthen fiscal sustainability.
Traditional fiscal discourse highlights deficits and debt-to-gross domestic product ratios. Although these indicators are essential, true fiscal health depends on how governments both manage liabilities and stimulate economic growth and productive capacity. By strategically investing in both labour and capital, especially in technology and digital capacity, governments can create the conditions for sustainable prosperity.
Balancing the books matters, but it is no longer enough. Now, the central question is how resources can be transformed into enduring value.
How governments fund their investments is a question of competitiveness. Fiscal policy should treat financing strategy as a lever to optimise costs, risks and long-term value. Responsible debt channelled towards productive assets strengthens fiscal sustainability. Borrowing tied to outcomes such as digitalisation, the green transition or infrastructure modernisation is increasingly seen by markets as value creation rather than risk.
Making the most of opportunities
One opportunity lies in harnessing demographic shifts. As ageing public-sector workforces retire, governments face natural reductions in labour costs. Rather than absorbing these savings into baseline budgets, governments can redirect them into productive investments. Reallocating labour savings into digital, technological and emerging artificial intelligence-enabled capital offers a path to simultaneously address affordability and effectiveness.
Data and digital tools now enable governments to track value creation, support auditability and help identify priorities for public investment. Governments that invest in data infrastructure build trust and legitimacy while improving resource efficiency. Furthermore, these tools can streamline processes and improve efficiency in the public sector, reducing transaction and opportunity costs.
Analysis by EY’s economic advisory team across 10 western European countries over a 30-year horizon shows that an investment equivalent to 1% of the total annual compensation of the public-sector labour force is sufficient to finance capital investment needs (Figure 1). This is equivalent to, on average, 2.5% of GDP over the time horizon. Every year, more than 1% of the public-sector workforce reaches retirement age. Therefore, allocating 1% to capital investment will be achieved through natural attrition, while still leaving a budget to hire new public-sector labour and upskill the existing workforce.
Figure 1. An ageing public-sector workforce provides opportunities
Average age of the public-sector workforce for 10 western European countries (C1 – C10)
Source: OMFIF-EY: Investing for a productive state 2025
Targeted investment in digital and technological capital, financed by labour savings, generates significant productivity gains: GDP multipliers of around three times over 30 years for the median advanced economy, and revenue multipliers of roughly 1.1 times (Figure 2). These investments expand both the economic base and fiscal capacity, enabling governments to reduce debt burdens over time without sacrificing growth or public-service quality.
Figure 2. GDP growth improvements from investing in digital capital
Average annual increase in GDP growth relative to the benchmark, %, across 5-, 10-, 20- and 30-year horizons
Source: OMFIF-EY: Investing for a productive state 2025
Such strategies do not require higher overall spending. By repurposing existing borrowing or reallocating naturally occurring savings, governments can pursue productivity-enhancing investment while maintaining fiscal discipline. What matters most is the ability to measure the effects of these decisions, model alternative pathways and transparently manage trade-offs.
Recognising the long-term impact of investments means moving beyond annual budgets to multi-year planning and assessing life cycle economic effects. Embedding measurement and evaluation ensures spending decisions are guided by evidence of value. Fiscal systems are shaped not only by technical constraints but by incentives, narratives and institutional capacities.
The need for change
An investment-orientated narrative provides policy-makers with a more optimistic and productive frame for decision-making, moving beyond austerity to a focus on value creation. For institutions, this demands improved data systems, stronger modelling capabilities and medium-term planning frameworks. For citizens, it offers a clearer link between public money and tangible improvements in services, prosperity and welfare.
Delivering on this agenda requires alignment across government, markets and society. Elected leaders must act as disciplined investors; institutions must embed performance, accountability and long-term value in decision-making; and capital markets should act as partners to reward transparency and purpose. Citizens, in turn, must be empowered to hold governments accountable for results.
By placing public value at the centre of fiscal strategy – combining fiscal discipline with strategic innovation – governments can build a productive, competitive state that generates lasting economic and social returns.
Andrea Correa is Senior Economist at OMFIF.
Download ‘Investing for a productive state’.
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