Public debt is higher today and growing at a faster rate than before the pandemic in 80% of the world's economies. According to the latest fiscal report from the International Monetary Fund, global public debt could rise to 100% of GDP by the end of this decade if it continues to increase at the current rate. The increase in public debt also comes against a background of great geopolitical and economic uncertainty, which could seriously jeopardize global financial resilience.
The experience of public debt and inflation in recent years has put the issue of countries' indebtedness, the limits on it and, more broadly, fiscal sustainability once more under the spotlight. In fields such as investment in research, development and innovation, the question takes on an almost structural nuance. Should we invest more in R&D to support sustainable growth and productivity or cut spending to reduce debt? The answer is by no means simple.
A new study, in which Jorge Mario Uribe, coordinator of the Finance, Macroeconomics and Management (FM2) research group and member of the Faculty of Economics and Business at the Universitat Oberta de Catalunya (UOC), took part, examines the question in greater depth. After analysing data from 44 countries between 2000 and 2022, with macroeconomic, institutional and financial variables, the team concluded that cutting back on R&D does not necessarily lead to greater financial stability simply because it involves a reduction in spending. The key is to spend wisely and in a coordinated way.
R&D and financial stability, an ambivalent relationship
The article, published in the Applied Economics journal with the support of the Latin American Reserve Fund -with the participation of Carlos Giraldo and Iader Giraldo, from the Fund, as well as José Gómez-González, from Lehman College of the City University of New York-, explores how investment in R&D affects financial stability and, in particular, the system's resilience to macroeconomic shocks. This relationship, according to the researchers, is not obvious and has not received enough attention in the scientific literature: investing more in research boosts long-term sustainable growth, productivity and resilience, but increased spending can damage financial stability if debt levels become too high.
"A country's financial stability depends on structural and regulatory factors, as well as short-term flows. In general, it is thought that excessive government spending could lead to reduced financial resilience, due to an increased perception of the country's risk and a decrease in its ability to pay," said Jorge Uribe, a researcher affiliated to the UOC-DIGIT Centre. "In this sense, any expenditure, even on R&D, could contribute to greater instability."
At the same time, the article's co-author pointed out that, due to the positive effects associated with investment in science, in terms of productivity and growth, the direct effect of increasing research spending is also positive. In short, the positive a priori effects of investing more in R&D could be undermined by the fiscal impact of increased spending. "There is no single key to successful investment that can be gleaned from our study; it's a matter of planning spending in a coordinated manner," said Uribe.
The key is balance
Simply increasing public investment in research and development is not enough to guarantee financial stability; it must be part of a broader strategic fiscal framework that manages public spending intelligently. This is the conclusion of the article, which focuses on the importance of maintaining fiscal discipline to preserve that stability.
"Our research also warns against indiscriminate cuts," stressed Uribe. "What may initially seem like a step in the right direction by reducing spending, does not end that way, once the impacts of R&D investment on financial stability are considered. The idea is to cut back in other areas, while maintaining or expanding scientific research, which is a challenge in terms of coordinated spending design." For the researcher, moreover, in this coordinated and smart approach to spending, public-private cooperation is fundamental.
The results of the study offer two valid interpretations. On the one hand, policymakers should focus on allocating public resources in order to prioritize R&D, while keeping overall spending under control. On the other hand, private investment in science can be seen as a key mechanism for harnessing the stabilizing effects of R&D and innovation, without triggering excessive public spending. In other words, industrial policies that focus on encouraging increased private spending on research, rather than directly increasing public research activity, are key.
"Our findings suggest that whether investment in research is effective in supporting financial stability depends on maintaining fiscal discipline," the researchers concluded in the article. "To maximize the potential of science as a driver of economic growth and improve stability, it must be part of a carefully managed public spending framework. This approach ensures support for innovation while maintaining the sustainability of public finances, leading to greater long-term economic health and resilience."
This research is part of the UOC's Digital Transformation and Sustainability research mission and contributes to the following UN Sustainable Development Goals (SDGs): 8, Decent Work and Economic Growth, and 9, Industry, Innovation and Infrastructure.
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