After the deficit has slipped, is France at risk of going off the road?
2024-03-23 09:57:00
“Bankruptcy”, not for now
“Let’s keep our cool”asked the Minister of Economy and Finance Bruno Le Maire on Friday on BFM TV.
Even if France’s public deficit in 2023, which will be revealed on Tuesday by INSEE, will be significantly higher than the 4.9% initially forecast by the government, the State “is not bankrupt”also tempered the president of the Court of Auditors Pierre Moscovici on RMC/BFM TV.
“There is no problem of debt sustainability”, he added, emphasizing that France’s loans remained a safe asset and therefore rather popular on the bond markets. Borrowing rates have also shown no sign of spiraling despite the announced slippage in the public deficit.
If the Court of Auditors estimates the savings that the government must make at 50 billion to get back below the 3% deficit, “I never said we had to make 50 billion at the start of the school year”insists Pierre Moscovici.
The head of the Court of Auditors calls for comparing these 50 billion to the hundreds of billions of euros of increase in French debt since the Covid-19 pandemic (from 2,380 billion in 2019 to 3,088 billion at the end of September 2023).
The probable passage of the deficit beyond 5% of GDP in 2023 – as Bercy documents suggest – is not a first: it had climbed to 6.4% in 1993, 7.2% in 2009 and even 9% in 2020.
Macroeconomic indicators mixed, but not “catastrophic”
Several recent economic indicators, such as the business climate or the private sector activity index, suggest that the economy could restart soon.
President Emmanuel Macron (L) listens to his Finance Minister Bruno Le Maire (D) at the Elysée, Paris, March 2023Photo POOL/AFP / Kin Cheung.
The financial situation of companies is also “rather good, in any case better than after previous crises, like the shock of 2008-2009”he adds. “It’s rather reassuring”even if there are “heterogeneity” around this average, with an increase in bankruptcies.
Another advantage: significant household savings. “It could be a lever if they decide to reduce it and support consumption a little more”, explains Mr. Plane. Everything depends “if they are worried” or not
All these factors could help growth restart. According to Charlotte de Montpellier, economist at ING, “GDP could grow by 0.2% in the second quarter, and accelerate further in the second half of the year”.
“It’s not catastrophic, but it’s not a strong growth scenario”, regrets Mathieu Plate. A scenario which could seriously compromise the objective of reducing the deficit.
Deficit below 3%, unattainable objective?
Betting on strong growth, the government committed to bringing the deficit below 3% of GDP by 2027. A deficit of 5.6% in 2023 instead of 4.9% would constitute a “big blow of bamboo”warns Mathieu Plane. “The stair step to get back below 3% would be that much higher.”
Without touching on taxes, the equation seems impossible to solve. And even when raising them, “It’s going to be very difficult to achieve.”warns Mr. Plane, who advises abandoning the 3% objective in 2027.
According to the economist, going from 5.6% to 3% deficit with low growth (1.2% or 1.3%) would represent a total effort of 70 to 80 billion euros.
Now, such cuts, “extremely important” in public money, would risk having “big impacts on purchasing power, the situation of businesses and investments”, which will then reflect growth. “We risk entering a spiral of austerity, the mistake made in Europe between 2011-2012,” he warns.
However, the government maintained its trajectory on Friday, with Bruno Le Maire promising to keep “this line at all costs”.
MP Renaissance concedes that this will be “more complicated than expected” because of this “significant slippage”in particular because the means of changing the current trajectory are “boundaries” for 2024. Cuts by decree are capped and the option of a supplementary finance bill (PLFR), which would allow greater savings, is risky if the oppositions do not cooperate, threatening to add “a political crisis with economic concerns”.
On the other hand, “levers exist for 2025”affirms the majority deputy: the next finance law will leave “time to make in-depth reforms” and for “a real debate”.
