Debt as Investment: Off-Balance Sheet Capacity and Implementation in the European Union

Can governments address today's policy challenges - such as the green transition and the threat of economic recession - without increasing their debt? And if so, can all governments do so equally? This paper explores the resources required for government policies that are not reflected in government debt calculations and compares these capacities across European Union Member States. Development banks, government guarantees for corporate lending, and public-private partnerships are key policy instruments that enable governments to deliver public policies without adding to their official debt levels. These "off-balance sheet policies" are excluded from public debt calculations because governments operate as if they were profit-driven market actors. This feature is particularly significant for countries with high debt burdens and those under strict fiscal oversight, such as in the European Union. However, I argue that not all countries possess the capacity to implement off-balance sheet policies effectively. This paper identifies three critical factors that determine whether governments can establish such policies: their market position, the legacy of policy infrastructures, and their political context. In doing so, it challenges two prevailing assumptions: first, that governments intentionally design off-balance sheet policies to circumvent debt rules, and second, that establishing off-balance sheet mechanisms is straightforward if governments choose to pursue them. By addressing these misconceptions, the paper contributes to ongoing debates about state capacity and the factors shaping fiscal capacity in policy design.