Government debt allows further support to the economy

ING Economisch Bureau
Erasmus School of Economics

As the coronavirus turns out to be less temporary than previously expected, politicians are wrestling with the question of how long government support can continue. On 3 September 2020, the ING Economics Department published a report based on interviews with ten economists. Among them Bas Jacobs, Professor of Public Economics at Erasmus School of Economics.

Neither one of the economists is worried about the sharp increase in the budget deficit and public debt due to the substantial support packages. They underline that the Netherlands entered the crisis with a low debt ratio (debt as % of GDP), even in comparison to other highly developed countries.

Debt threshold

The economists agree that an exact threshold is unknown, but that there is a limit to debt. Opinions are divided on where this limit lies, but despite different estimates of the level of the critical debt limit, the economists do not expect the Netherlands to exceed that limit. According to the CPB, even in a second corona wave with additional support measures, the debt ratio will remain below 80% and therefore far away from critical levels.

Active debt reduction

In time, the government measures should end. Not only because of public finances, but especially because it is not good for the productivity of businesses in normal times to be dependent on government support. The economists are divided on the question of whether the public debt should be actively reduced. Half of the economists do not think it is necessary to actively reduce the debt ratio by creating budget surpluses. They emphasize that part of the debt ratio will fall by itself when economic growth returns. Moreover, after the crisis, the budget deficit also decreases as tax revenue increases and benefit expenditure decreases. As a result, less or no debt is added.

The other half of the economists believe that the debt should be actively reduced, but only as soon as the economy is fully self-sufficient again. They argue for a buffer for the next shock, so that the public debt does not end up in the danger zone. Therefore, they are more cautious when it comes to the question of how much margin should be built up.

Large buffer in public finances

At this moment, the government does not pay interest on additional debt, in fact, they get money paid. However, the interest rate may rise in the future. Maintaining a certain upper limit, which could rather be around 80% or 90% of GDP, therefore seems wise. The expected debt ratio will also remain well below this limit after all the support packages. Since expenditure will remain balanced, no immediate reason seems to be apparent for a rapid reduction in the increased debt ratio, even if the virus is under control.

Report of the ING Economics Bureau

Professor
More information

The full report of the ING Economics Bureau can be downloaded above, 3 September 2020 (in Dutch).