No cuts in spending: let the money roll

Algemeen Dagblad
Erasmus School of Economics

The tone in the House of Representatives has changed: instead of tough cuts after an economic crisis, the bill is now being passed on to future generations. Cuts would be too damaging for economic growth. Bas Jacobs, Professor of Public Economics at Erasmus School of Economics, also believes that the government should temporarily spend more: 'By stimulating the economy, the damage of the corona crisis can be recovered more quickly.’ However, Jacobs also outlines an important side note.

Tackling the corona crisis or increasing the size of the government? 

‘As a result of the corona measures, the economy is in lockdown and we are partly in recession', Jacobs says. ‘By stimulating the economy, the corona damage can be recovered more quickly. Politicians should not, however, mix up tackling the corona crisis with increasing the size of the government.’ By this Jacobs means parties that want to structurally spend more on healthcare and social security or reduce taxes. ‘That is not the same as solving a crisis. Such spending has nothing to do with fighting the corona crisis. Meanwhile, companies have to pay substantially more. That entails some risks. If charges are significantly higher, companies will invest less or may leave for abroad. That reduces economic growth and employment.’

Classic left-wing themes

Jacobs observes a 'substantial shift to the left' in all political parties. ‘They are all in favour of a larger collective sector, more income equality and higher taxes on businesses. Those are all classic left-wing themes. The result is that the bill is passed on to future generations. A higher national debt is in fact deferred taxation.’

Jacobs points out the risks of spending too much in the long term. ‘I see two scenarios for the macro-economy. In the most likely scenario, interest rates and inflation stay low and it will be no problem at all that the national debt is rising now. In the less likely scenario, there is a risk that the corona crisis has destroyed a lot of things. If too many companies go bankrupt and production capacity disappears, when the corona crisis is over and we will be able to buy all sorts of things again, then not everything will be available. This will result in inflation, rising interest rates and the increase of the cost of the national debt.’

More information

The full article from Algemeen Dagblad, 2 March 2021, can be found here (in Dutch).