"Good debts": Are higher national debts to finance the economic stimulus packages justified?

The economic stimulus packages cannot be financed from the normal state budget. What remains is massive government borrowing. Is the rise of state indebtedness in the face of the dramatic decline in economic activity justified? For Winfried Fuest, Cologne Institute of the German Economy and University of Applied Economics, Bergisch Gladbach, "neither fiscal policy paralysis nor hectic policy action" are what is needed. Without doubt it is an economic certainty that in an economic crisis the so-called automatic stabilizers should be allowed to work and thus policy-makers should not offset tax revenue shortfalls and additional spending in the economic downturn by discretionary tax increases but that they book this as cyclically conditioned deficits. This stabilisation effect does lead to a smoothing of the business cycle but, however, it is not sufficient for a stabilisation or trend reversal of the current massive decline in economic activity. For this reason it is necessary also to use the strategy of a discretionary, counter-cyclically oriented financial policy for combating the current crisis even if the deficits due to the economic stimulus rapidly increase. However, such a governmental fiscal policy must be grounded in specific criteria, for example, it should avoid measures with of a "watering-can nature" and permanently designed consumptive and social-policy spending programmes; instead governmental investments as well as cut in taxes and social insurance contributions should be used for strengthening potential growth. Reinhold Schnabel, University of Duisburg is also sceptical: "Even supposedly good debts are a burden: The increase in state indebtedness will lead to an increasing interest burden for the state budgets in the near future." Schnabel see a further danger in that some of the measures will not be only temporary spending increases but will cause a lasting increase in government expenditures and threaten the urgently needed consolidation of the public budgets that will stand on the agenda after the recession is over.