After the war is over ...

(Sung to the time of 'After the ball is over', and I mean the war against the coronavirus)

Most governments in developed countries are running deficits relative to  GDP which they haven't done since the WWII.   And the question is, what will they do after we have contained the coronavirus or even found a vaccine and a cure?  One alternative is to try to cut spending and raise taxes to pay back the outstanding debt.  This is the conventional wisdom today.  The trouble is, because government spending is such a large chunk of total spending, if the government slashes spending, it will cause economic activity to decline.  

After  WWII, guided by the insights of John Maynard  Keynes, most western countries didn't do this.  Instead, they relied on economic growth to reduce their debt-to-GDP ratios.  They continued to borrow money to fund infrastructure investments.  Despite this, their debt ratios declined.  

When interest rates and bond yields are zero or even negative, it's a sign that inflation and growth expectations are so low that private investment spending isn't and won't be enough to get growth going again.   The best way to increase growth when this happens is for the government to build infrastructure funded with debt.  This way, not only is overall demand in the economy increased, but it also adds to supply.  By building freeways, urban/light rail, high-speed long distance rail, schools, wind farms, the grid, etc., the productive capacity of the economy is increased.  Cutting interest rates doesn't necessarily add to demand when interest rates are already low.  Debt-funded infrastructure spending does.

As long as the budget deficit's percentage of GDP is below the nominal rate of GDP growth, the total outstanding debt as a percentage of GDP will continue to decline.  And as long as the borrowings are used to fund projects which add to productive capacity, they are sound.

Doug Cameron, a former NSW Labor senator, made this tweet:

Public debt to GDP was huge after WW2. Didn’t stop massive public investment in jobs, public housing, education and health. Debt diminished as economic growth kicked in.

We must ignore right wing fear campaigns on debt and rebuild a better more caring and productive society.

I think he's right.  Countries which try to pay down debt using austerity, will grow more slowly than those which try to stimulate growth using deficit spending to fund infrastructure.