Published on September 26, 2023 at 6:43 p.m. Updated on September 26, 2023 at 6:50 p.m.
The interest rates at which States borrow are rising sharply. Is there any real cause for concern for you regarding public finances?
This is a relative worry. With the tightening of monetary policy and the rise in interest rates, there is obviously a stronger constraint on fiscal policy. The debt burden has seen a sharp rise – even if part of it is transitory and linked to inflation – and now represents around 2% of GDP. It’s not nothing.
But we must keep in mind that as long as growth in value (taking into account inflation) remains higher than the interest rate – and this is still the case – then we avoid the snowball effect on the debt which can remain under control and even decline.
There is therefore a real cause for concern, because the increase in the debt burden limits our room for maneuver, but the debt does not necessarily become unsustainable.
Was this additional debt nevertheless useful?
This is the real question to ask. The “whatever it takes” during the health crisis maintained the purchasing power of households and above all made it possible to save the productive fabric, so it was useful.
For the energy crisis, France has chosen to maintain a broad aid policy, while Germany has opted for more targeted measures. Basically, we blocked prices when Germany wrote checks.
I was quite skeptical at first, but I must recognize the virtuous points of French policy: ultimately the price level increased much less than in Germany (4 points less), as did wages. This can give a competitive advantage to the French economy.
In this context, should public finances be quickly consolidated?
This would not be the right timing for austerity. But the government’s 2024 finance bill does not go in this direction, it clearly does not reflect austerity logic. Public spending is falling, but without any real structural effort. It is the end of emergency aid that allows the budgetary equation to hold together.
Is the government’s strategy the right one?
Yes. This is the right strategy. The reduction in spending in France is limited by its three commitments. A global commitment to reducing greenhouse gas emissions, which requires investing 30 billion euros of public money each year; a European commitment to reduce deficits structurally, which would amount to 12 billion euros in savings each year.
Finally, there is a French commitment not to increase taxes, to restore public services, and to also maintain the purchasing power of the most modest. This is an untenable equation in the short term, unless we think that there will be a lot of growth tomorrow, that is the government’s bet.
In this context, can the executive exempt itself from measures to support purchasing power?
This is only sustainable if the labor market remains dynamic and unemployment continues to fall. And even in these conditions, it will be difficult given the losses in purchasing power already recorded.
The main savings measures proposed are focused on employment policy and the bottom of the distribution.
Remember that the basic monthly salary has lost nearly 4 points of purchasing power since the start of the energy crisis. Even if inflation falls, the price level will remain high. When the State withdraws its aid, income will go down a notch. This is also the main threat to the finance bill.
For the moment, purchasing power is holding up more or less because the French economy is creating a lot of jobs and unemployment is falling. However, today, all surveys are sending signals of a possible turnaround in the labor market. In 2024, unemployment is likely to rise again.
Among the main savings measures proposed, the government plans to reduce its support for subsidized contracts. Is this a good lead?
The 2024 budget is based on the idea that 2024 is still a promising year in terms of the economy. It’s perilous. The main savings measures proposed are focused on employment policy and the bottom of the distribution. The government believes that since unemployment is falling, it is necessary to stop supporting subsidized contracts. He wants to play on unemployment insurance rights. These are policies that work when the economy is at the top of the cycle.
Is the deficit reduction trajectory planned by Bercy, in these conditions, tenable?
No, at the OFCE we believe that the deficit in 2024 will be higher than the 4.4% of GDP targeted by the government and will remain close to this year’s 4.7% of GDP.
The government wants companies in certain sectors to reduce their margins. What do you think ?
There is nothing in the proposed budget to encourage them to do so. But for more than a year, corporate margins have been the primary vector of inflation. We could then perhaps consider making certain aid conditional – for example, reductions in charges between 2.5 SMIC and 3.5 SMIC – on the fact that companies agree to increase their remuneration and moderate their margins.
Can we avoid further tax increases in France?
If we want to respect our three commitments, I don’t see how we can do without tax increases. The narrative will be important. It will be important to remember that everyone, including the wealthiest households, was helped during the health crisis. This is partly what explains the rise in the savings rate today.
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