Fiscal Credibility Remains at Stake During Presidential Vote Despite Enhanced Budget Rules

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

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

The enhanced framework introduced a revamped expenditure rule that covers total public expenditure, increases budgetary transparency and accountability, and enhances supervisory powers of Parliament and the French fiscal council.

These reforms, announced with little fanfare amid the pandemic crisis, constitute an important step forward in enhancing fiscal credibility – but they do not hold the heft of constraints on excess government spending that we see in the Nordics and Germany.

France’s fiscal fundamentals versus credit rating peers
% of GDP

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

France’s public expenditure versus the EU average
pps of GDP

Source: Eurostat, Scope Ratings GmbH

French public expenditure among the highest of the world, and above EU average

France’s public expenditure is among the highest in the world, amounting to 56% of GDP in 2019, 9.8pps higher than the EU average. France’s public spending is consistently higher than that of EU peers by relatively small margins across most components – except economic affairs (+1.7pps) and welfare spending (+5.3pps), the latter which is structurally more generous and protective than that within other advanced economies, softening the blow during economic shocks but potentially a source of longer-run spending pressures.

Matching fiscal commitments made by the government via an enhanced governance framework with structural reforms will prove essential to gradually rebuilding fiscal buffers. The fiscal effort required to narrow the budget deficit to below a 3.0% of GDP EU limit is substantial, reflecting circa EUR 47bn in required savings over a next five years according to the Cour des Comptes.

Election campaigns have largely ignored questions around fiscal discipline and debt reduction

Political campaigns ahead of these presidential elections have largely ignored questions related to more careful public spending and debt reduction. Many candidates promise extra spending without systemically matching extra revenue increases, raising additional concerns with concern to long-term fiscal sustainability, particularly as the growth outlook weakens.

France is left counting on structural economic reforms to boost growth potential to bring down debt-to-GDP, hence importance of the reform agenda of the incoming president and his or her ability to muster parliamentary majority required to push measures through.

Read Scope Ratings’ report.

For a look at all of today’s economic events, check out our economic calendar.

Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.

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