Why the national debt is not (yet) a problem on this Prinsjesdag

In the run-up to this Princes Day, the national debt, which for a long time had to be reduced in particular, was relatively carelessly pushed aside by politicians. While the debt rose at an unprecedented rate: from almost 50% of gross domestic product (GDP) in 2019, i.e. half of everything we make and earn in the Netherlands, to over 60% now.

There are also forecasts by the Netherlands Bureau for Economic Policy Analysis that go far beyond that 60% in the event of a possible second corona wave. However, no one really seems to care about those figures either. Within Europe, the 60% standard to which euro countries had had to adhere for years was soon abandoned.

According to an initial estimate, our national debt could amount to EUR 491 billion. For the time being, however, do not panic. How about that? CCeit op 3 explains it:

After years of strict budgetary policy, with surpluses being used mainly to pay off public debt, it is now permissible for the debt to rise. After all, politicians argue: there must be generous support to keep the economy afloat. In order to finance that, money must be borrowed.

There have always been economists who believe that you should never make cuts during a crisis, because that leads to even more economic damage, says ING chief economist Marieke Blom. But given the special circumstances, such as the transience of the virus and support measures, there are simply more now

In her view it is less the view on sovereign debt, but more the situation that has changed. For example, there are few similarities between this crisis, caused by a pandemic, and the credit crisis in 2008. Blom: Due to much higher interest rates and concerns about the fundamentals of the Dutch economy, severe austerity measures were implemented at that time. Later it turned out that there had been a lot of fierce intervention and that there was a lot of room for manoeuvre in public finances

Economists agree that the public debt may now increase. But they do differ on how long it can go on without any problems, says Lex Hoogduin, professor of economics and former director of De Nederlandsche Bank. He, too, thinks the emergency packages are necessary. But I dont believe that the debt can reach heaven and we have to throw money at it

As soon as the virus is under control, according to Hoogduin, the cabinet must take steps to bring the debt back below 60%. There is no need to make cuts now, but you must ensure that the non-correlated budget for the next Budget Day is within the lines. It may well be that savings will have to be made otherwise, for example in the care sector

Hoogduin says that the fact that the Netherlands adhered to the 60 per cent standard is paying off: our country had a buffer as a result. That is why the Netherlands is in a good position to do this now. But you also have to build up new apples for the thirst. Because one day there will be another setback

Bas Jacobs, Professor of Economics and Public Finance at the Erasmus School of Economics, takes a different view. According to him, even after corona, running up public debt is not a problem. The government can borrow at negative interest rates, so it gets money when it is in debt. And the norm is not a problem either, because as long as the interest rate is lower than the growth of the economy, the debt ratio, the debt as a percentage of GDP, goes down automatically

Whether public debt will become a problem in the future, according to Sandra Phlippen, chief economist of the ABN Amro, depends on two things: how the interest rate develops and how the borrowed money is spent. For example, a good investment would be to combat climate change, because she believes that global warming poses a major threat to economic growth.

She believes that higher interest rates could be problematic in a highly indebted world, although that is very unlikely for the time being. Higher interest rates could arise, for example, in the event of a world trade war. If world trade comes to a standstill, inflation occurs and if it becomes too high for too long, interest rates will rise. In that case, the national debt would become very expensive

For a long time now, interest rates have been falling and this does not seem to change any time soon, says Phlippen: Lower interest rates are intended to stimulate consumer spending and save less. Low interest rates are mainly a problem for institutions that earn money from lending, i.e. banks