Economy & Politics

Corona crisis: Make debts for the future

The debt level in Germany will be a good 70 percent of GDP next year.imago images / Political Moments

After Finance Minister Olaf Scholz and Economics Minister Peter Altmaier pulled the “bazooka” in the corona pandemic and the state is still using Corona aid programs to ensure that the effects of the Corona crisis do not lead to massive insolvencies and unemployment, the debate now has started how all the debt should be paid back. Many see debt as a burden for future generations. CDU parliamentary group leader Ralph Brinkhaus said in an interview with Die Welt in September that the repayment of corona debts within 20 years was therefore “intergenerational justice.”

Many economists, on the other hand, say that this austerity mentality could do more harm in the long term. Harvard economists Larry Summers and Jason Furman now even write: The debt level alone says nothing about the sustainability of debt. You could even get out of debt out of the crisis. Just how is that supposed to work?

First of all, let’s take a look at the level of debt: next year it will be a good 70 percent of gross domestic product (GDP) in Germany. But what does that actually mean? Any debt accumulated in the past is compared to 70 percent of current GDP. Debt will only become a burden for future generations if the cost of repaying the debt increases in the future. That in turn only happens when economic output, i.e. GDP, falls or interest rates on debt rise.

Debt alone is not important

So comparing the accumulated debt to current economic performance is of little help in making a statement about the burden on future generations, according to Summers and Furman. So what? One should compare the future interest payments with the future growth rates of economic output.

Interest rates across the economy are unlikely to rise in the next decade. Many economists and bankers agree on this. The German state can currently even borrow for free. For a ten-year government bond, he’ll get even more back in ten years than he borrows today.

So the question remains how the economy will grow in the future. And the state can influence that too. Because it depends on what the state spends the borrowed money on.

If one euro of new debts yields a real return of zero euro or more, then higher debts are profitable and benefit future generations. Then the economic performance of the state would be better off in the future than without the national debt.

Government spending can boost GDP

Such investments are some, but not all, of the long-term effects of the pandemic. But it can also be an investment in the state infrastructure or education of the population. Investing in early childhood education in particular means that children’s incomes (and thus probably also their productivity and tax revenues) rise sharply later in life, calculated the economists Nathaniel Hendren and Ben Sprung-Keyser from Harvard University.

Government spending often has a positive return even in crises. That is why countries around the world are currently spending a lot of money to support the economy. In times of low interest rates, states are more in demand than ever before. When interest rates were higher than they were 20 years ago, central banks were able to offset economic downturns by lowering key interest rates and stimulating the economy. However, key interest rates have been low around the world for years, sometimes at zero. Further rate cuts are either not possible or ineffective. Many countries in Europe, the USA, England and Japan will therefore not be able to avoid higher government spending in the future anyway in order to stabilize the economy in times of crisis. The debt will increase.

The risk of increasing debts is of course that interest rates will rise again for unforeseen reasons, even if the risk for the near future is low. That is why it must be carefully considered beforehand that the state uses its expenditures in such a way that they stabilize the economy or lead to more growth in the future.

Anyone who cares about future generations must therefore consider what the state spends the money on and where it saves it, whether it helps them or not. But debt alone is not enough to assess the burden of debt on future generations.

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