Faced with a French public deficit that exceeds forecasts and highlights an economic outlook that is more restrictive than expected, Patrick Artus identifies the four possible fiscal policy options and what they imply.
France’s public deficit reached 5.6% of Gross Domestic Product in 2023.
If we use a reasonable growth forecast, for the period 2024-2027, we arrive at 0.8% annual growth on average, while the French government was counting on 1.5% average growth over these four years. This will result in a deficit of 1.8% compared to the forecast level, and therefore a public deficit in 2027 of between 4% and 4.5% of GDP and not 2.7% as initially expected by the government.
The important question that will then arise is: should we correct this excess public deficit (the public deficit initially forecast was 4.9% of GDP in 2023 and 4.4% of GDP in 2024), which will probably reach around 1.5 points of GDP in 2027?
Four Fiscal Policy Tracks
We believe that four avenues of fiscal policy are available a priori: accept the increase in the public deficit; combat it by reducing public spending; fight it with higher taxes; respond with a change in the structure of public expenditure.
Some will point to the low level of the 10-year interest rate differential between France and Germany (44 basis points) or the example of the United States (where the public deficit amounted to 7.5% of Gross Domestic Product in fiscal year 2023) to defend the idea that there is no need to reduce the public deficit. This strategy seems very dangerous to us: with the data present, the public debt ratio would increase by 3.5 points per year, which would quickly become unbearable.
Reducing public spending
The second path of fiscal policy is then to reduce public spending enough to bring the public deficit down to the desired level (2.7% of GDP in 2027), and the third track is to increase the tax burden, again to correct the public deficit.
The first problem with both of these policies is that they reduce growth; as a result, it is necessary to reduce public spending by 2 percentage points of GDP or increase the tax burden by 2 percentage points of GDP per year, after taking into account the effect on growth in order to reduce the public deficit by 1 percentage point of GDP. This means that, if these policies are put in place, France’s growth will be reduced from 0.8% per year between 2024 and 2027 to 0%, there would be a stagnation over 4 years of activity.
The second problem with these two policies is that the reduction in public spending naturally focuses mainly on future spending (research and development, education, aid for reindustrialization, energy transition) and the increase in taxes on taxes whose reduction had made France more competitive (with the flat tax on income from capital, the abolition of the wealth tax).
Focusing on the future
We can therefore think that neither the reduction of public spending nor the increase in taxes are policies that must be adopted to correct France’s public deficits.
There is one last option: gradually, without generating a sudden shock, increase the weight of future spending (research and development, aid for the energy transition or relocation, education and vocational training spending) and reduce the weight of social protection spending (retirement, health, unemployment compensation) in total public spending.
Using the stimulation of the supply of goods and services and not the contraction of public spending or the increase in taxation to reduce the public deficit allows that it is the improvement of growth that is at work to reduce the public deficit and not the contraction of public spending and therefore that of activity. This policy of substituting future spending for social protection spending is also favourable from the point of view of intergenerational equity.