Ageing populations and persistent labour shortages are challenging traditional assumptions about the role of fiscal policy in supporting economic growth. As the link between unemployment and economic slack weakens, the effectiveness of stimulus spending becomes increasingly uncertain. Understanding the functioning of public investment under these new structural conditions therefore requires examining not only demand-side effects but also the supply-side constraints that shape how economies absorb fiscal impulses.

This brief evaluates how labour market tightness interacts with public investment across EU countries and finds that fiscal stimulus is substantially more effective when paired with labour market reforms. Under these circumstances, the fiscal multiplier – the increase in GDP generated by each additional unit of government spending – rises sharply and can exceed 1.5 even in tight labour markets. These findings imply that in ageing economies, effective fiscal policy increasingly depends on integrating public investment with structural reforms to expand productive capacity and prevent crowding out of private sector activity.