Fiscal credibility still at stake in presidential vote despite tightened fiscal rules

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The structural weight of public spending in France – the ratio of cyclically-adjusted spending to potential GDP – has fallen only one year in three since 2000, compared to an average of one year in two in the rest of the EU.

The government of President Emmanuel Macron has strengthened France’s fiscal framework to reverse years of budget deficits and ever-growing public debt, which have distinguished France from more frugal member states of the European Union. France’s public debt reached 112.9% of GDP in 2021, an increase from 97.4% in 2019.

The strengthened framework introduced a revamped expenditure rule that covers total public expenditure, increases budget transparency and accountability, and strengthens the oversight powers of the French parliament and budget council.

These reforms, announced without much fanfare amid the pandemic crisis, are an important step forward in bolstering fiscal credibility – but they do not hold the weight of the constraints on excess government spending we see in the Nordics. and in Germany.

France’s fiscal fundamentals relative to its credit rating peers
% of GDP

Note: Bubble size and label numbers refer to 2021 public debt-to-GDP ratio. Source: IMF, INSEE, Scope Ratings GmbH

France’s public expenditure compared to the EU average
pp of GDP

Source: Eurostat, Scope Ratings GmbH

French public expenditure among the highest in the world and above the EU average

France’s public spending is among the highest in the world, amounting to 56% of GDP in 2019, 9.8 percentage points above the EU average. France’s public spending is consistently higher than its EU peers with relatively low margins across most components – with the exception of economic affairs (+1.7 pp) and social spending (+5 .3 pp), the latter being structurally more generous and protective than those of other advanced countries. economic shocks, softening the blow during economic shocks, but potentially a source of longer-term spending pressures.

Matching fiscal commitments made by the government through a strengthened governance framework with structural reforms will prove essential to gradually rebuild fiscal buffers. The fiscal effort required to bring the budget deficit below the EU’s 3.0% of GDP limit is substantial, reflecting approximately USD 47 billion savings needed over the next five years according to the Court of Auditors.

Election campaigns have largely ignored issues of fiscal discipline and debt reduction

Political campaigns leading up to these presidential elections have largely ignored issues related to more prudent public spending and debt reduction. Many candidates promise additional spending without consistently matching incremental revenue increases, raising additional concerns about long-term fiscal sustainability, especially when growth prospects weaken.

France is counting on structural economic reforms to boost growth potential to reduce the debt-to-GDP ratio, hence the importance of the new president’s reform agenda and his ability to muster the necessary parliamentary majority to push through the measures .

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Thomas Gillet is Associate Director of Sovereign and Public Sector Ratings at Scope Ratings GmbH. Thibault VasseSenior Analyst at Scope Ratings, contributed to this commentary.

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