“The new debt does not restrict the state’s budgetary leeway”

The debt ratio in Austria rose considerably this year. The Institute for Economic Research (Wifo) expects a debt ratio of 86 percent of gross domestic product (GDP) in 2020 and 87 percent in 2021. In 2019 it was still around 70 percent. In an interview with the “Wiener Zeitung”, economist Margit Schratzenstaller explains how the debts affect and whether they have to be repaid:

“Wiener Zeitung”: Ms. Schratzenstaller, in the Corona crisis, the state controls the economy. It distributes grants, guarantees loans, and cuts taxes and fees. But the new powerful state raises a lot of questions: Who pays for all of this?

Margit Schratzenstaller: The Corona aid and the economic support measures ensure extensive increases in spending and losses in tax revenue. The Fiscal Council estimates that two thirds of the total costs of the crisis are caused by discretionary measures as part of the corona aid, and one third by the automatic stabilizers. The state finances this additional expenditure and shortfall in income by taking out loans. This creates budget deficits because the state spends more than it receives, and the debt level increases.

Margit Schratzenstaller has been working in the research area “Macroeconomics and European Economic Policy” at the Austrian Institute for Economic Research (Wifo) since 2003. The economist was deputy head in 2006/2008 and 2015/2019. She is a member of the Austrian Fiscal Council and the ÖGfE – Austrian Society for European Politics, lecturer at the University of Vienna, member of the board of trustees of the European Forum Alpbach and the Center for Administrative Research. “- © Alexander Mueller

Who pays the state’s debts?

The interest payments that are incurred on the national debt have to be paid from the current budget and are ultimately borne by all taxpayers. However, Austria is currently getting into debt on very favorable terms, so that the increasing debt is not associated with corresponding additional expenditure on interest. On the contrary: this year, interest expenditure will reach a historically low level despite record new indebtedness and debt levels.

Why is that?

As in previous years, a number of old loans that had relatively high interest rates are currently – and will continue to run – expiring. You will be refinanced by new debt for which the interest cost is practically zero. The considerable new borrowing does not restrict the state’s budgetary leeway. It is therefore not so urgent to repay the debt in this crisis.

The central banks’ purchase programs keep interest rates low. Can the European Central Bank (ECB) print as much money as it wants without any consequences?

Some observers fear that the strong expansion of the money supply will fuel inflation in the long term. However, a scenario of a sharp rise in inflation is currently very unlikely, given the economic downturn. Companies are reluctant to invest, wages are rising only very moderately, consumers are reluctant to consume and are currently saving a lot. At the same time, there are no supply bottlenecks. But if economic growth picks up again after the acute crisis, inflation could rise, and with it interest rates. To a certain extent, this does not have to be a major problem, since at the same time the budget situation is improving due to the strong economic growth and thus the rising interest rates can also be managed in terms of budget. However, the ECB’s policy has its limits, at some point a tipping point will be reached. It is difficult to predict when this point will be reached.

Is it really necessary to reduce debt?

As long as the Corona crisis has not been overcome in terms of health and economy, there is in principle no alternative to the high national debt to finance Corona aid. Because the alternative would be an even more massive economic slump, many corporate bankruptcies and mass unemployment. However, when the crisis is over, national debt should be reduced again.

Then why should the state repay its debts after all?

On the one hand, to create budgetary leeway again for a possible next crisis. A debt ratio of seventy percent, as Austria had before the outbreak of this crisis, is certainly a better starting position to go into massive debt to finance the crisis than a debt ratio that approaches ninety percent of economic output. It is also about the trust of the creditors in the ability of the state to be able to service the debts. Furthermore, although interest rates are currently very low, if they rise again in the future, interest costs will also increase in the medium term.

What measures should the state take to reduce its debt once the crisis has been overcome?

If consolidation measures are taken after the crisis has been overcome, they should be designed to be growth and employment-friendly as well as distribution-conscious. On the expenditure side, it would make sense – and for this the course can and should be set now – to work on the major reform construction sites.

Which reform construction sites do you see?

Long-term reforms are necessary, for example in federalism or in the funding system, which can slow down the long-term expenditure dynamic. The combination of economic stimulus packages with long-term goals, keyword green investments, as well as a tax structure reform that promotes growth and employment, which replaces the high taxes on work with environmentally-related taxes, income from property tax and an inheritance tax as well as the reduction of tax exemptions, can lead to ecologically sustainable Contribute to growing out of debt.

Can the debt even be reduced in the foreseeable future?

It depends on a number of factors. As calculations by the Fiscal Council show, growing out of debt can take some time: if a balanced budget and GDP growth of two percent can be achieved from 2022 onwards, it will take until 2029 for the debt ratio to return to its pre-crisis level of seventy Percent goes down.

Some are fundamentally against national debt, others see no problem in unlimited national debt. Is the Debt Question a Question of Faith?

For some, the question of debt is indeed a question of faith. However, a pragmatic and objective approach is more helpful: There is no alternative to the current national debt to cushion the social and economic consequences of the Corona crisis and it is reassuring that the state is in the comfortable situation, given the low interest rate level, that the current record debt is also the fiscal sustainability not endangered. As soon as the corona crisis has been overcome, however, a long-term reduction in national debt should be sought, whereby here too no hasty and short-term consolidation packages should be implemented, but rather long-term reforms and an ecologically and socially sustainable, stable development of growth and employment should be.

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