- State debt in Belgium is high, but much lower than 20 years ago. Also in Holland, we see a small decrease of state debt. In France, Germany, and the UK it increased.
- Importantly, most state debt in Belgium is in hands of local banks holding state bonds using the deposits of the citizens. In a way, the Belgian population ows itself 100% of its national product. This makes debt sustainable. Moreover, as interest rate are very low - both for bonds as, as a consequence, on deposits - historic debt has been refinanced, and current debt is not growing.
- The increase of debt between 2008 and 2009 is found in all countries, but most remarkably in the UK. This is surprising, as the fundamentals before the crisis were weak, but it still had its independent national bank, unlike Eurozone countries. It did not benefit from this to shield the British economy from the global demand shock.
- The two-year increase in Belgium in 2008 and 2009 was larger than the next six years - the government aid to the three largest banks must be behind this (Dexia, Fortis, KBC), mainly because in 2008 the rest of the economy was doing very well.
- The crisis was more costly to the Netherlands, both in absolute and relative terms.
- Germany, during the years of flexibilization, witnessed an increase of state debt - probably because of the integration of East-Germany, which was not an unambiguous success story. Since 2010, in the age of austerity, the state debt has decreased. As shown elsewhere, output caught on again as well. However, more people are now in poverty. It appears that growth - debt - inequality is an impossible trilemma.
The gov. debt as a percentage of GDP only expresses the extent to which the country is able to pay back the debt. As it has GDP in the denominator, it is sensitive to business cycle swings. Let's look at the picture when expressed in euros (below). The first thing we notice is that we cannot compare levels, as countries are of unequal size, something the GDP accounts for in the above statistic. However, we can now judge whether governments have made the choice to either pay back debt, or reduce taxes. Typically, Ricardian economists would say both are equivalent, but clearly in practice there is a great deal of debate on either, so it may not be neutral in the short run. For instance: foreign companies may be attracted by the low taxes, but not by lower state debt. For political parties, the promise of low taxation may yield more voters, who are blind to the state debt that will eventually have to be repaid. So as a second observation, we see that in Belgium and the Netherlands, state debt was never repaid - mind that this would cost around 30 billion EUR in Belgium for any 10% decrease in the ratio with GDP if GDP is stable.
Of course, besides the size of the economy and productivity, GDP also accounts for inflation, so surely if one counts on inflation debt will evaporate. Unluckily, there was no inflation since the crisis, and we flirted with deflation for a while. I believe austerity measures in Europe, while trying to sanitize budgets in order to increase the confidence in states, have had a reverse effect by decreasing demand, lowering inflation, and hence increasing the debt ratio.
Remarkably, in this chart we see that in the UK, France, and Germany (the latter until 2010), gov. expenditure and debt skyrocketed in the last two decades. So the increase of the debt ratio is not only a demand shock, it is real debt growth. In relative terms, the state could afford the debt growth because GDP was growing. In that sense, the Netherlands and Belgium resisted the temptation.
To conclude: Belgium chose for lowering taxes, as an alternative to paying back debt in times of economic growth. Because growth and inflation slacked all across Europe after 2008, the debt ratio did not improve as much as maybe expected, likely because the strategy of lowering taxes resulted not in higher wages, but in higher profits which are relatively untaxed, so no increases in consumer expenditure nor of government expenditure, and hence a slowdown of the economy, as it was seen all accross the EU. Maybe Ricardian equivalence is correct in theory, but wrong in practice in the short run.
