“The road is straight, but the slope is steep.” Former French prime minister Jean-Pierre Raffarin’s aphorism was mocked in his day, but it visually described what awaits France in terms of its budgetary trajectory. The broad outlines were sketched out on Thursday, April 20, by Finance Minister Bruno Le Maire and Public Accounts Minister Gabriel Attal, and will be formally presented on April 26 at the Council of Ministers. The purpose is to inform the European Commission about France’s ability to meet its commitments under the Stability and Growth Pact, which is the basis for coordinating public finances within the eurozone. While the objectives are clear, the road to achieving them is going to be bumpy.
There has been a long period of ignoring the issue of financial credibility, sometimes for good reasons (the “whatever it takes” approach related to the pandemic and the surge in energy prices), but often for less obvious reasons, like procrastination and an inability to reduce spending. But now the French government is finally showing some resolve.
One month after the Court of Auditors’ warning, which stated that “France’s debt is becoming very problematic,” the goal is to return to a public deficit of 2.7% of gross domestic product (GDP) in 2027 from 4.7% in 2022. With regard to the debt, the government is counting on a slow decline to 108.3% of GDP within four years, four points better than today.
To achieve this, the government has an unexpected advantage: inflation. The strong rise in prices is pushing up GDP in absolute value, allowing the debt-to-GDP ratio to be reduced mechanically. But this boost will not be enough to restore France’s financial credibility.
The European Commission agreed in 2020 to suspend the rules of the Stability Pact because of the Covid-19 pandemic and the war in Ukraine. But this truce ends in 2024 and, although negotiations are underway to make the mechanism more flexible, they will not change its overall architecture. France’s European partners have integrated this deadline and they have all set out to bring their deficits below 3% by 2025. It is hard to imagine that France could fail to meet its commitments while claiming to continue to have such a strong influence on European decisions.
The government is counting on a return to full employment and an acceleration of growth, which are far from being achieved, while wanting to engage in a “cooling” of public spending. The term expresses extreme caution, with public spending weighing 58% of GDP, eight points higher than the European average.
It is true that the context does not look promising. The list of urgent investments (climate, health, education, defense, industry) is getting longer and longer. Moreover, in a country where the habit of “whatever it takes” is struggling to dissipate, where the opposition – including some members of the right-wing Les Républicains – has abandoned any talk of controlling public finances, and after the pension reform, which was adopted by force, it will not be easy to convince people that the time for debt reduction has come.
One argument, however, should attract attention. By 2027, the burden of the French debt will become the largest item of government expenditure. “The choice is clear: Either debt reduction now, or taxes tomorrow,” warned Le Maire. But given the steepness of the slope, resorting to both has not been excluded.