2023-10-10 17:00:00
Will the French public deficit be reduced to 2.7 points of GDP in 2027? In any case, this is the objective stated by the public finance programming law (LPFP) which defines the multi-year trajectory of public finances up to this date and which was finally adopted on September 29, after having been rebutted by the National Assembly in December 2022.
We can seriously doubt it. Indeed, from 2012 to 2021, none of the first five LPFPs achieved their objectives for reducing the public deficit and the Covid-19 crisis, in 2020, only made things worse since the public deficit is still expected at 4.9% in 2023, well beyond the 3% threshold. As a result, public debt reaches 110% of GDP, a level higher than the average for eurozone countries and well above that of Germany.
This time, based on growth hypotheses that the High Council of Public Finances (HCFP) considers too optimistic, the LPFP 2023-2027 provides, once again, a gradual decline in the deficit, even though the weight of the burden interest rates will increase considerably over the period due to the rise in interest rates.
Forecast of unprecedented drop in spending
Above all, it is the LPFF’s spending forecasts that are unrealistic. Excluding interest charges, they would be almost stable in volume over the period (+0.1% per year), which represents a much more ambitious trajectory than that achieved in the past, the lowest ever reached being +0.9 % between 2010 and 2014. But even based on the LPFP forecasts, with a public deficit expected at 2.7% in 2027, France would be the last country in the European Union (EU) to fall below 3 %. As the priority sectors of ecology, defense, national education and justice will benefit from a substantial increase in their budget, credits for other programs must decrease by 1.8% in volume over the period. Never seen.
To maintain this trajectory, there would need to be a determined audit of expenditures which has not started. Moreover, the four successive steps to modernize the State over the past twenty years, such as the General Review of public policies of 2007-2011 or the Modernization of public action of 2011-2016, have never been successful. Expensive private consulting companies were nevertheless mobilized but these audits always had no impact on public spending.
First stage of the LPFP, the draft budget for 2024 only announces a modest reduction of 0.5% in the public deficit to 4.4% of GDP. However, the growth rate retained by the government in 2024, of 1.4%, remains well above the analysts’ consensus of 0.8%. In reality, this modest reduction would only come from the cessation of exceptional support measures for purchasing power for around 16 billion euros – end of the energy tariff shield of 10 billion and refocusing of aid to businesses of 4.4 billion. Other expenses are expected to increase by 4.8% in value (2.2% in volume), which is very far from the medium-term ambition.
Will the EU discipline France?
How can we get the government to announce more realistic objectives? In France, the High Council of Public Finances, responsible for monitoring the LPFP since its creation in December 2012, has never really challenged the often fanciful assessments of the structural deficit – which excludes cyclical variations in the economy but which is impossible to measure directly – published by successive governments.
What about EU constraints? Faced with the recurring budgetary excesses of the cicadas, the Treaty on Stability, Coordination and Governance (TSCG) of 2012, or the European budgetary pact, had imposed stricter budgetary rules on the twenty-five signatory states. In France, the organic law of December 17, 2012 immediately transposed the treaty by strengthening the role of a legislative vehicle introduced during the constitutional revision of July 23, 2008: the public finance programming laws, responsible for origin of defining the multi-annual orientations (over a minimum of three years) of public finances with the objective of balancing the accounts of public administrations.
READ ALSO Budget: when the government promises to reduce the “ecological debt” These laws, however, remain budgetarily non-binding because they do not have the legal nature of finance laws. This is why, to pass the LPFP 2023-2027 using 49.3, the government opportunely convened a very brief extraordinary session of the National Assembly on September 25, just before the ordinary session, thus saving itself a cartridge useful for the current session.
Thanks to the TSCG, the LPFP have thus become the support for European commitments via monitoring the structural deficit. This key concept of the pact, despite its delicate assessment, must converge towards a maximum of 0.5% of GDP – it is currently close to 5% and the government is aiming for a target of 2.7% in 2027.
Due to the Covid-19 pandemic, the European Commission had triggered, in 2020, the derogation clause of the Stability and Growth Pact, which allowed Member States to temporarily deviate from its requirements due to exceptional circumstances, but this clause will fall at the end of 2023.
At the same time, Brussels is proposing an overhaul of budgetary constraints, which would abandon the reference to the structural deficit but would strengthen financial sanctions in the event of an excessive deficit, greater than 3% of GDP. No one knows, today, what the signatory States of the Pact will accept, but its renegotiation will be tense between the “frugal” countries and good students in matters of public finances, led by Germany, and the cicadas, including France has become the symbol despite itself.
The shadow of financial markets
In the absence of real European sanctions, financial markets will undoubtedly play the role of censor of budgetary policies. The sudden rise in long rates, which followed the rise in short rates of the European Central Bank (ECB) for more than a year, significantly increased the cost of public debt, the rate of the 10-year German bond – the benchmark in the euro zone – having crossed the 3% mark on October 4, a first since 2011.
At the same time, in France, not only did the rate of the 10-year assimilable Treasury bond (OAT) experience a spectacular increase of 38 basis points in one month to reach 3.5% – beyond the government forecast of 3.4% – but the famous “spread”, which designates the difference between French and German rates – or the additional cost that the French State must pay to borrow –, and which the markets follow carefully, tends to increase widen and today reached 50 basis points.
READ ALSO Budget 2024: but where are the real savings? To ensure the recovery of French public finances, we therefore believe that the only effective solution would be to make a leap towards greater federalism. In 1998, the creation ex nihilo of a common central bank and then of a single currency by sovereign states constituted a historic monetary challenge that went beyond the American precedent. In 1792, the thirteen founding States had decided, at the same time as the dollar, the creation of a State and a Federal Treasury with budgetary autonomy and taking over all the debts of the federated States. Nothing of the sort in the euro zone, since the thirteen founding members of the euro jealously retained their budgetary and fiscal prerogative.
In a more federalist system, the budgetary sovereignty of the euro zone could thus be transferred to a supranational body inspired by the ECB model. However, within the new European budgetary limits, States would retain their sacrosanct fiscal sovereignty.
* Eric Pichet is professor and director of the Specialized Master’s degree in heritage and real estate at Kedge Business School. Holder of a doctorate and the authorization to direct research in management sciences from the University of Littoral Côte d’Opale (Dunkirk) as well as a doctorate in law from Panthéon-Assas, he works mainly on global macroeconomic environment, monetary policy, public finances and the economics of taxation.
**This article is republished from The Conversation sous licence Creative Commons. Lire l’article original.
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