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Protect against the effects of inflation, but without affecting the state of public finances too much. This is the challenge for European states at the moment. The French government is presenting its 2023 draft budget to the Council of Ministers, this Monday, September 26. And this budget is marked, unsurprisingly, by a significant increase in spending.
After three years marked by the Covid and exceptional support for the economy, the French government is continuing this momentum, despite its stated desire to get out of “whatever the cost”.
If we stick to the latest arbitrations transmitted for the first time upstream to parliamentarians, budget appropriations would be up by 21.7 billion euros.
An increase that we owe to the new tariff shield to protect the French from rising energy prices. It alone costs 16 billion euros. It is more than anticipated before the summer. Inflation went through it.
Fiscal discipline, which the government hoped to reinstate, will have to wait
So the government is betting on higher-than-expected tax revenues to meet future spending. And it provides for a deficit limited to 5%. But the debt burden is jumping dramatically and will cost more than 51 billion euros next year.
After years of negative rates, it’s back to reality. Interest rates on ten-year government bonds rose from -0.4% at the start of the year to a decade-high 2.6%.
The debt which currently weighs 112% of French GDP will increase further in the years to come under the effect of the rate hike decided by the European Central Bank. This will further reduce budgetary leeway in the future.
Moreover, France is not alone in facing these challenges.
Fortunately for her, if we dare say, she does not stand out strongly from her neighbors. As the phenomenon of inflation is global, all governments have incurred extraordinary expenses and will be affected by the rise in rates. Outside the EU, the very costly support plan announced by the British government on Friday 23 September shook investors and caused the pound sterling to fall. In Europe, Germany spends the most in proportion to its GDP. Italy is just behind. There, ten-year rates have quadrupled in one year. Everyone is watching this indicator closely and waiting to see the new government at work to find out what direction public finances will take. Fear, seeing the specter of a public debt crisis in the euro zone reappear.
To avoid this, calls have multiplied in recent months to review the budgetary rules
Countries as distant on these issues as Spain and the Netherlands have called together for a new budgetary framework that sticks to the new realities: soaring public debt and huge investment needs. The European Commission has suspended until next year its famous rules limiting the debt and the deficit of the States. The EU has equipped itself with new tools intended to prevent systemic risks for the euro zone. And a reform of the complex rules of the Stability and Growth Pact is underway.