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According to the OECD, in The Netherlands, public debt is 78% of GDP and private household debt is 277% of GDP. Eurozone rules require a budget deficit of no more than 3% (not sure if this depends on economic growth or inflation). The previous Dutch government was praised by some for reducing the public debt. At the same time, private debt was growing.

What is the rationale for focussing on the reduction of public debt, in a situation where private debt is much larger and growing?

  • NB: I believe this question fits better on Politics than on Economics, but feel free to migrate if I'm wrong. – gerrit Mar 23 '17 at 13:46
  • There are some aspects of this worth asking separately on Economics, specifically the exact effect of private household debt on overall economy. – user4012 Mar 23 '17 at 14:23
  • @user4012 I'm not sure how to formulate a question on those aspects without it being too broad. – gerrit Mar 23 '17 at 14:24
  • "Is there a consensus on the effects of 200+% private household debt on economy in Nordic countries"? – user4012 Mar 23 '17 at 14:25
  • @user4012 I've given it a try, let's see how the question is received there. – gerrit Mar 23 '17 at 14:37
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  1. Impact of having debt

    • Public debt is the money that needs to be paid by the taxpayers (while the state ostensibly owes it and it's backed "by full faith and credit" of the state, in the end, in practice, it is paid out of revenues collected mainly via taxes; as that "credit" is on account of government's taxing power), which means that it is a direct function of government and policy.

      • What is even worse, morally, is that it's also time-shifting this: the government spending is on behalf of people living now; while 30 year obligations will be paid with taxes collected 30 years from now; by next generation.
    • Private debt is the money that private entities owe. The only ones that are affected by having to pay it are those who incurred it, not other people (taxpayers).

      • The brass tacks are a bit more complicated, as that debt is shifted onto a society if unpaid, e.g. during bancruptcy; or if things fall out in a systemic way as was the case with 2009 financial crisis. But that's more of edge case scenarios; only affecting a small portion of all private debts; so the public impact is still not big.

      • There are other public considerations as far as macroeconomic effect of household debt; but that's far murkier and less direct - for example, effects can actually differ between short and long term; and different models and studies don't always agree.

        For example Nassim Nicholas Taleb argues (in Black Swan and later) that for resiliency's sake, debt financing needs to be gone alltogether and replaced with full on equity financing (sorry for lack of citation, as I heard it first hand at his talk I attended).

  2. What can be done?

    • Public debt: this is incurred by government expenses, therefore it's possible to reduce by either raising government revenues to match expenses; or by reducing expenses. Both are matter of public policy and thus can be focused on.

    • Private debt: while some nudge based policies can have impact here; there's really not all THAT much direct government action can achieve here.

      Just to be clear, some levers exist (e.g. interest rates; tax deductability of mortgage interest - hat/tip @gerrit); but they don't have nowhere near a direct 1:1 effect a public debt reduction policy would.

      In other words, there's no point of "focusing" on reduction of private debt as no amount of focus will substantially help there - and given the different impacts, politically there's no win in focusing on private debt.

  • @gerrit - that's my second bullet point (the one that has Taleb stuff). Yes there are effects; but they are far less direct and obvious – user4012 Mar 23 '17 at 14:09
  • I don't understand the point about debt financing replaced with equity financing. What would a mortgage look like? To my understanding the 277% only includes household debt, not other private debt such as from companies. I suppose it's dominated by mortgages, which are expensive because in NL, interest is 100% tax-deductible. Government policy is actively encouraging private household debt, so I'm not sure if I agree that there is little government can do. – gerrit Mar 23 '17 at 14:11
  • @gerrit - i'm not confident that I'm entirely equipped to explain that; I would recommend going to primary source (Taleb) if you're interested. – user4012 Mar 23 '17 at 14:14
  • @gerrit - that's a valid point, I clarified the answer with more nuanced wording. – user4012 Mar 23 '17 at 14:17
  • (-1) Raising revenue or reducing spending does not have a 1:1 effect on the deficit. That's a major fallacy. And incentives and public policy certainly can have “substantial” effects on private household debt. – Relaxed Apr 26 '17 at 0:13
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Private household debt is pretty irrelevant.

That's a bit bold statement, considering just the percentages, but the debt is chiefly in the form of mortgages, and therefore backed by houses. The upshot is that home-owners with a mortgage are paying about 2% interest (I just got a proposal from the bank for 1.35%), instead of paying rent. Mortgage debt is just the smart choice.

Loan-to-value figures of Dutch mortgages are approximately 60%; in other word the mortgages are backed by about houses worth 400% GDP. While some individuals may suffer from TLV rations in excess of 100%, on the whole there is sufficient value backing mortgages. This is visible in default losses significantly under 0.1% by banks, even during the crisis.

State debt on the other hand isn't really backed by profitable assets. There's a few billion in bank shares after the bail-outs, a railroad that's making a small profit (but that's just not using all subsidies), and an airport. The only assets that historically was profitable was natural gas, and that's being shut down over earthquake fears.

One thing to remember is that the Netherlands has significant private pension reserves; even the government has 382 billion euro in pension reserves. In total, the reserves are close to 1.3 trillion euro. This represents 103% of pension promises at Net Present Value.

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    I don't understand your point that public debts are not backed up. Surely the state has huge assets, most notably, an entire tax-raising country? Government bonds in most countries are often seen as a very secure investment (which is why they raise so little interest). An individual private household income is at risk of dropping to near-zero whenever someone becomes unemployed. The likelihood that the government of The Netherlands would go bankrupt is essentially nil. – gerrit Mar 24 '17 at 10:18
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    @gerrit: Calling citizens "assets" is rather cynical. More importantly, assets represent economic goods which appear on a credit&debit balance; taxes appear merely on the profit&loss. This represents the fact that tax income cannot be sold (historically there have been systems in which tax rights could be sold to private tax collectors). – MSalters Mar 24 '17 at 11:21
  • @MSalters Now, that is completely irrelevant. On the other hand, private household debt (and other private debt) does matter and gerrit's comment is spot-on. – Relaxed Apr 26 '17 at 0:15

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