Government deficit: why the set objectives are never achieved – Today
Économie

Government deficit: why the set objectives are never achieved – Today

Will the French government deficit be reduced to 2.7 points of GDP by 2027? In any case, this is the objective set by the Public Finance Programming Act (LPFP), which defines the multi-annual trajectory of public finances until this date and which was finally adopted on September 29, 2023, after being refuted by the National Assembly in 2023. December 2022.

Eric Pichet, Kedge Business School

We may seriously doubt it. From 2012 to 2021, none of the first five LPFPs achieved their government deficit reduction targets, and the Covid-19 crisis in 2020 has only made matters worse, with the government deficit still projected to be 4.9 in 2023 % will be well above 3%. threshold value. As a result, public debt reaches 110% of GDP, a level higher than the average of Eurozone countries and well above that of Germany.

The development of public debt in the eurozone (in points of GDP).Supreme Council for Public Finance (September 2023)

This time, the LPFP 2023-2027, based on growth assumptions that the High Council of Public Finances (HCFP) considers too optimistic, will again ensure a gradual decline in the budget deficit, even though the weight of interest costs will increase significantly over the period as a result of the increase in interest rates.

Predicting an unprecedented decline in spending

Above all, it is the LPFF’s expenditure forecasts that are unrealistic. Excluding interest charges, they would be virtually stable in volume over the period (+0.1% per year), representing a much more ambitious trajectory than achieved in the past; the lowest level ever reached was +0.9% between 2010 and 2014. But even based on the LPFP forecasts, with an expected government deficit of 2.7% in 2027, France would be the last country in the European Union that falls below 3%.

Because the priority sectors of ecology, defense, national education and justice will benefit from a substantial increase in their budget, appropriations for other programs should decrease by 1.8% in volume over the period. Never seen.

Growth rate of government expenditure (excluding interest charges) in volume (in %).Supreme Council for Public Finance (September 2023)

Sustaining this trajectory would require a determined audit of expenditure, which has not yet begun. Moreover, the four successive steps to modernize the state over the past twenty years, such as the General Review of Public Policies of 2007-2011 or the Modernization of Public Action of 2011-2016, have never been successful. Nevertheless, expensive private consultancy firms were mobilized, but these audits always had no impact on public expenditure…

The first phase of the LPFP, the draft budget for 2024, announces only a modest reduction in the government deficit by 0.5% to 4.4% of GDP. However, the government’s 1.4% growth rate for 2024 remains well above the analyst consensus of 0.8%.

In reality, this modest reduction would only result from the end of exceptional purchasing power support measures for approximately 16 billion euros (end of the 10 billion energy tariff shield and redirection of 4.4 billion in aid to companies). Other expenses are expected to increase by 4.8% in value (2.2% in volume), which is far from the medium-term ambition.

Will the EU discipline France?

How can we ensure that the government announces more realistic targets? In France, the Supreme Council of Public Finances, charged with overseeing the LPFP since its creation in December 2012, has never really addressed the often erratic assessments of the structural deficit (which excludes cyclical fluctuations in the economy but is impossible to measure directly). doubted. ) published by successive governments.

What about the European Union restrictions? Faced with recurring budget overruns, the 2012 Treaty on Stability, Coordination and Governance (TSCB), or European Fiscal Compact, imposed stricter fiscal rules on the 25 signatory states. In France, the Organic Law of 17 December 2012 immediately transposed the Treaty by reinforcing the role of a legislative instrument introduced during the constitutional revision of 23 July 2008: the Public Finance Programming Laws, originally responsible for defining multiannual directives . over a period of at least three years) for public finances, with the aim of balancing the public administration’s accounts.

However, these laws remain budgetary non-binding because they do not have the legal character of financial laws. This is why, in order to adopt the LPFP 2023-2027 using 49.3, the government conveniently convened a very short extraordinary session of the National Assembly on September 25, 2023, i.e. just before the regular session, thus allowing them to useful pattern for the current session.

Thanks to the TSCG, the LPFP has therefore become the support for European obligations through monitoring the structural deficit. This key concept of the pact, despite its delicate assessment, should converge to a maximum of 0.5% of GDP (currently it is almost 5% and the government is aiming for a target of 2.7% in 2027).

Due to the Covid-19 pandemic, the European Commission had activated the derogation clause of the Stability and Growth Pact in 2020, allowing Member States to temporarily deviate from the requirements due to exceptional circumstances, but this clause will expire at the end of 2023.

At the same time, Brussels is proposing a revision of budgetary constraints, which would abandon the reference to the structural deficit but tighten financial sanctions in the event of an excessive deficit above 3% of GDP. No one knows today what the signatory states of the pact will accept, but the renegotiations of the pact will be tense between the “frugal” countries and good students of public finance led by Germany and the locusts that France has become , despite her being the symbol of the pact. It.

The shadow of the financial markets

In the absence of real European sanctions, the financial markets will undoubtedly play the role of censor of fiscal policy. The sudden rise in long-term interest rates, which followed the rise in short-term interest rates of the European Central Bank (ECB) for more than a year, significantly increased the cost of public debt; the yield on the ten-year German government bond (the benchmark in the eurozone) after crossing the 3% mark on October 4, a first since 2011.

At the same time, France saw not only the yield on ten-year assimilable government bonds (OAT) a spectacular increase of 38 basis points in one month to 3.5% (above the government forecast of 3.4%), but the famous ‘spread’, which indicates the difference between the French and German interest rates (i.e. the additional costs the French state has to pay to borrow) and which the markets monitor carefully, tends to increase and today reaches 50 basis points.

To guarantee the recovery of French public finances, we therefore believe that the only effective solution would be to make a leap towards greater federalism. In 1998, the ex nihilo creation of a common central bank and then of a common currency by sovereign states posed a historic monetary challenge that went beyond the American precedent: in 1792, the thirteen founding states had decided, at the same time as the dollar, the creation of a state and a federal treasury with budgetary autonomy and the assumption of all debts of the states. Nothing of the sort in the Eurozone, as the thirteen founding fathers of the Euro jealously retained their fiscal and budgetary prerogatives.

In a more federalist system, the eurozone’s fiscal sovereignty could therefore be transferred to a supranational body, inspired by the ECB model. However, within the new European budgetary limits, the states would retain their sacred fiscal sovereignty.The conversation

Éric Pichet, professor and director of the Specialized Masters in Heritage and Real Estate, Kedge Business School

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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