You probably know the image from Looney Tunes: Wile E. Coyote chasing Road Runner at full speed, landing above a ravine and stopping there, waiting for the inevitable fall. At present, many experience the same when they look at the development of public finances. Thanks to support and stimulation policies, global government debt is rising at record speed. That cannot go on like this, can it? Don’t all those debts ever have to be paid off again? Has economic gravity been abolished?
Indeed, governments cannot continue as they currently do indefinitely. Recent figures from the European Commission show that public debt in the eurozone is rising to about 105% of gross domestic product (GDP) (before the crisis it was 85%). Debt ratios are much higher in the United States and Japan, at 135% and 259% respectively. Those are unimaginable figures, which we once only saw in countries that just came out of a war. Everyone understands that there is a limit somewhere: a government cannot indefinitely continue to create debt at a rate well beyond economic growth. But where is the limit?
Research shows that government debts often had a negative effect on the economy when they were at 80% - 100% of GDP. But now we don’t see any of those effects. Globally, interest rates are low. What can change, is the monetary policy. Alumnus Pieter Hasekamp, director of the CPB Netherlands Bureau for Economic Policy Analysis, discusses the pros and cons of structurally increasing expenditure. He states that however important education, healthcare, social certainty, infrastructure, climate, safety and purchasing power are – not everything can increase simultaneously. The economic gravity has not been abolished.
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