Public debt remains below EU maximum despite corona, but is that necessary?

Public debt remains below EU maximum despite corona, but is that necessary?

The government debt has therefore remained below the EU limit of 60 percent of gross domestic product. “It’s good news that we stayed below that despite all that large expenditure,” says Lex Hoogduin, professor of economics at the University of Groningen.

“Financially we had the room to stay below that, because the budget was in order in the years before. That is why it is also important to continue to pursue sensible budgetary policy in the future. We do not have to intervene much to regain room below that. 60% to build for the next crisis.”

‘No arguments for less than 60 percent’

According to Marieke Blom, chief economist at ING, it is nice that the national debt did not rise sharply, but that it remained below that magical 60 percent does not matter much. “That’s a politically agreed-upon limit. There are no strong economic arguments to stay below it. Most economists think that debt up to 90 percent of GDP isn’t really a problem.”

Coen Teulings, professor at Utrecht University and former director of the Central Planning Bureau, agrees. “Almost all euro countries, including Germany, have long-term government debt of more than 60 percent. It is an open secret that that limit needs to be adjusted, because it no longer has any practical meaning.”

Blom believes that the government should on average spend more than it takes in. “The Netherlands could still stabilize the debt ratio (the debt to the economy) with a small budget gap every year. We can therefore afford a slightly more generous budget.”

‘More than enough spending space’

“Public expenditure that you are sure will yield a return, you really should do it,” says Blom. “Consider, for example, some education expenditure, which pays off later. The government is also allowed to borrow for some climate investments, even if the future generation does not benefit financially, but does benefit from a better living environment.”

According to Blom, the Netherlands has sufficient spending scope for the time being, even if there is another crisis. “Some say: a reduced debt gives a lot of room. But there is not much evidence that the Netherlands, even with a higher debt, would not have room for extra expenditure. Ultimately, it is especially important that a country can stabilize a debt, optimally is probably something between 60 and 90 percent.”

According to Coen Teulings, a debt of around 80 percent is reasonable and there are many things that that extra spending space can be used for. “Think of the labor market. Hiring self-employed people is so popular because it is often cheaper for companies. Do not tax people in paid employment so much, so that companies opt for it sooner. Invest in education, that is not going well. Make a teacher a more attractive and challenging profession.”

Low interest

The European Central Bank is currently ensuring that euro countries lose relatively little money on their high debts by keeping interest rates low and by buying up government bonds, i.e. loans from countries. As a result, countries pay little or no interest on their loans.

According to some, this means that high government debt is less of a problem. “I think that’s reckless,” says Lex Hoogduin. “There’s no reason to assume that interest rates can’t go up again. So you shouldn’t have a policy now that assumes interest rates will remain low. It’s like canceling your fire insurance because your house hasn’t burned down in 20 years.”

Risk to global economy

Italy is often mentioned as an EU country with a dangerously high public debt, at 160 percent. This could lead the country towards Greece, which almost went bankrupt and had to be rescued by other EU countries. “That is the real concern, not whether the Netherlands should have a slightly higher national debt,” says Hoogduin. “Italy will still pay the price for that high debt. And that is a risk for the entire eurozone and the global economy.”

Public debt remains below EU maximum despite corona, but is that necessary?
Source link Public debt remains below EU maximum despite corona, but is that necessary?

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