Budget deficit not a big problem


Last week, the government announced that its budget deficit will rise to 92 billion euros in 2020, which amounts to 11.8 percent of Gross Domestic Product. A big hit according to some, but according to Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, this increase is not such a problem at all.

‘The government is doing exactly what is needed’

Jacobs puts the situation directly into perspective. 'Almost half of the total deficit can be contributed to the measure taken by the government which grants companies tax deferrals. If all goes well, most of this tax money will return. Taken this into account, the deficit ends up being around 7 percent of the gross domestic product. Of course, this is still a large number, but the economy is taking a lot of hits right now and as a result tax income is falling and government spending is increasing. In addition, the government needs to finance many other things, such as health care and measures which are aimed at helping companies which are struggling with liquidity problems. I think the government is doing exactly what is needed in times of crisis: increasing debt and distributing costs over time.’

Too little government debt

Because of the deficit, many people are worried about possible cuts. Jacobs does not know if many cuts will be necessary. ‘This has to do with how high you think the national debt is allowed to be. I think that the current national debt may be a little too low and that an increase in the national debt is not so bad. Before the crisis, savings were high and investments were low and therefore interest rates are now extremely low. In fact, the rates are so low that the government receives interest on its loans, which means that if the debt increases, the government has more income. This is a paradoxical situation of course, but it suggests that the market thinks there is far too little government debt in the world.’

Worst-case scenario

According to Jacobs, debt sustainability will not be a problem. ‘It is true that if the crisis starts to damage the economy, and if this damage becomes very serious, interest rates will most likely rise in the medium term. This is basically a worst-case scenario in which there will be a lot of permanent damage. At that moment there may be more demand than supply in the economy and interest rates will rise. However, the current government policies are focused on trying to prevent permanent damage by keeping as many companies as possible standing.’

Politics instead of economics

Jacobs has no idea why the European Union implemented a regulation for a maximum public debt of 60 percent of Gross Domestic Product in the first place. ‘I think it is perfectly possible to stabilise the national debt at eighty or ninety percent of GDP without serious consequences, certainly in the Netherlands or Germany. This has more to do with politics than with economics.’

More information

The entire item from RTL Z, 27 April 2020, can be viewed here (in Dutch).