Growth revisions for 2024 are downwards, and a reduction in public spending may be necessary to meet the deficit target. For André Cartapanis, this would be a macroeconomic mismanagement.
France’s macroeconomic situation is deteriorating. Activity is running out of steam and the government is preparing to revise its growth forecasts for 2024: not +1.4%, the trend on which the budget was built, but rather +0.9% (+0.6% according to the latest OECD forecasts). As a result, tax revenues are suffering and the official target of a public deficit for 2023 of 4.9% of GDP, and 4.4% in 2024, could only be achieved at the cost of a reduction in certain public spending, in the order of 10 billion euros according to some sources. But that would be a macroeconomic mismanagement.
The Maastricht ‘magic numbers’
First, the justification for such a shift in the light of a high risk of unsustainability of the budget deficit and public debt is far from proven. The principle of sustainability is simple: it is a question of not exceeding a threshold (budget deficit/GDP, public debt/GDP) beyond which a State is no longer able to “roll” its debt, by refinancing expired Treasury Bills on the bond markets, and exposes itself either to default or to exorbitant risk premiums on the markets. But neither economic history nor economic theory has been able to measure these thresholds unambiguously, and the Maastricht “magic figures” (3% of GDP for the budget deficit and 60% of GDP for public debt) have never been the result of fully convincing theoretical modelling. Rather, they are conventional or incantatory in nature. The fact that the European Union’s fiscal rules continue to refer to it, including in the agreement reached last weekend, does not change this.
Risk of a political and social crisis
Fiscal sustainability depends on the future or anticipated value of many variables (interest rates, inflation, potential growth, savings rates, tax consent, etc.) but also on the social and political acceptability of the measures that may be deemed necessary to ensure the stabilization of the public debt burden. Today, in France, the risk of a political and social crisis seems greater than the risk of fiscal unsustainability, especially with savings rates that remain high and an appetite for government securities still very strong. A fiscal “turn of the screw” and the increased risk of new social tensions could lead to a downgrade of the sovereign rating and risk premiums, according to a self-fulfilling logic.
Reminder of the 2011-2013 economic policy error
Secondly, in the context of the ECB’s monetary policy remaining restrictive for several more months, and a global economy that is running out of steam, an “ex-ante” reduction in the government deficit would present a high risk of accentuating the slowdown in activity, and could even, “ultimately”, lead not to an improvement but to a further “ex-post” deterioration in the budgetary situation, taking into account the interplay of multipliers and the induced effects on tax revenues.
The further increase in public debt that the refusal of a new budgetary adjustment would cause is not an optimal solution for France and would create new tensions with Brussels. But the effects of a reduction in public spending in the current context could be much worse, reminiscent of the economic policy error within the euro area in 2011-2013 when fiscal consolidation, too fast and too massive, caused a recession in Europe while the global economy entered a new growth cycle.