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I'm undecided if it would be a net good or bad. If you think government should subsidize infrastructure that creates value that's hard to bill to users (like roads), then software is a pretty logical extension. However, given my personal knowledge of transportation project delivery and the astronomical amount of waste it includes, I suspect this might just make things worse.

I like NLNet model. NLNet isn't a government agency. NLNet is a nonprofit foundation that is responsible for distributing certain government grants, such as NGI Core Zero, which are themed for particular goals.

I definitely wouldn't want FOSS projects to apply directly to a government agency.

https://nlnet.nl/foundation/

OSTIF is vaguely similar and iirc from the USA

OSTIF scope is really narrow. It's mainly for patching security related bugs/vulnerabilities in existing large projects. And AFAIK it has a significantly smaller source of funding, relying on corporate donations.

It's not comparable to the projects that NLNet funds.

IDK maybe we just should let the EU pay for it

We need more funding, not less.