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Daily Dutch News in English

Dutch are poorly informed about causes of high public debt in the Netherlands

The public debt of the Netherlands has grown strongly as a result of the economic crisis. This is mainly the result of persistent gaps between public spending and tax income. The support to the financial sector and to European sovereigns is of far less importance, although many people believe otherwise, a survey by De Nederlandsche Bank shows.

As a result of the economic crisis, the public debt of the Netherlands has grown from 45% of GDP in 2007 to as much as 74% of GDP this year. Meanwhile, successive Cabinets have implemented sizeable austerity measures to restore public finances to health. How well-informed are the Dutch about the current magnitude of public debt? To find an answer to this question, respondents in the DNB Household Survey panel were asked about their knowledge of and attitude towards Dutch public finances. Asked about the current amount of public debt, over 20% of respondents were able to provide a reasonably accurate estimate (EUR 450 billion). On average, however, respondents underestimated Dutch public debt by a considerable margin.

Origins of the debt increase
Since the outbreak of the credit crisis (in early 2008), public debt has increased by some EUR 190 billion. Chart 2 shows why. The bulk of the increase is attributable to the difference between public revenue and regular expenditure (EUR 120 billion or about 18 percentage points of GDP). The support packages for Dutch banks and European governments (mainly through the emergency funds EFSF and ESM) amounted to ‘only’ 6% and 2% at the time of the survey. This year, with the repayment of state support on the one hand, and the nationalisation of SNS Reaal on the other, the net effect of public support to the financial sector will rise to almost 7% of GDP. However, this effect on public debt is still dwarfed by that of the regular budget deficits since 2009. This is in line with the findings of Reinhart and Rogoff (2009), who conclude that the direct costs of a financial crisis are usually much less severe than the indirect effects of the ensuing (sustained) growth slowdown.

The survey results show the many misconceptions that exist regarding the reasons for the growth of public debt. A large minority of respondents (43%) is well aware of the role played by regular budget deficits. Still, an even larger group (47%) think that support for Europe or financial institutions has been the main driver of public debt growth (27% and 20%, respectively).

Public knowledge and public support
Awareness of the background of public finances appears to be correlated with support for a budgetary policy based on European agreements. Especially those respondents who think that European support packages have been the main cause of the public debt growth attach less importance to compliance with European budget regulations. Of all respondents in this category, 48% think that it is ‘not really’ or ‘not at all’ important to adhere to European budget rules. That opinion is held by only 24% of respondents who think (correctly) that regular expenditure and revenue are the main cause of high public debt.

It follows that knowledge about the backgrounds of the current state of Dutch public finances is an important factor in public support for policies to bring the budget deficit and public debt down to within European limits. Given the large-scale guarantee schemes established for European sovereigns and, initially, for the domestic financial sector, it is perhaps understandable that misconceptions should have arisen. Yet the main cause of the current high public debt – and thus of the need to consolidate – has been the high level of government expenditure in relation to its income.

Source: De Nederlandsche Bank