On June 12, the Senate took an uncompromising assessment of the deterioration of public finances under President Emmanuel Macron. Extract : “the lack of rigor of the 2024-2027 stability program and the absence of an amending finance bill demonstrate the blindness of a government which does not take the measure of the issue and does not take into account the warnings of its administration”. Implacable. But there’s worse: “the unanticipated deterioration in 2023 impacts the 2024 deficit, already revised upwards, and which could further increase”. In other words, the public deficit will be much higher than expected this year… It could reach 5.3% compared to a forecast revised this spring to 5.1% and an initial objective of 4.4%. Two reasons for this: the base effect linked to a larger deficit than announced in 2023 and above all a very poor assessment of the revenue side. Good luck to the next government!
A slow loss of confidence
For several quarters, we have observed a reassessment of credit risk for France, linked to the increase in the deficit and to objectives in this area which are neither achievable nor credible. It’s a structural problem. Covid, often used as an excuse, has a good back. Consequence: France’s debt is perceived as riskier by the foreign investors who finance us.
At the start of 2022, the spread [NDLR: écart] between the ten-year borrowing rate of France and that of Germany, which measures investors’ perception of risk with regard to French debt, was 30 basis points. At the beginning of June, it was around 50 basis points. Due to the political uncertainty linked to the dissolution, it rose to 80 points. There’s no reason to panic, yet. To be able to talk about a debt crisis – a risk often wrongly mentioned in the electoral campaign – the rate gap would have to rise to around 125-150 basis points. On the other hand, investors endorse the idea that, on the budgetary level, France will experience a slow decline – already recorded against Germany – and in progress against the Iberian countries. Without a plan to reduce spending, our public debt should be around 115% of GDP in 2028 compared to 80% for Portugal, for example.
We will not have difficulty financing ourselves – the demand will always be there. But the borrowing rate could rise to a level close to 4%, compared to 3.1% currently – which is a game-changer in terms of budgetary margins. The higher the rates, the more difficult it will be for us to meet the repayment of the debt burden, and the more difficult it will be to bring them down; even while implementing structural reforms.
Many ways to reduce expenses
The announcement of the audit by the RN was an important signal. It reflects an awareness of budgetary constraints. The result will be bad, unsurprisingly. But the new government will not have the luxury of waiting several weeks before announcing a spending reduction program. Investors are waiting for France on this subject. During the period of the sovereign debt crisis in the euro zone, between 2010 and 2013, the budget was tightened by 0.72% of GDP per year. Our public finances are now in a worse state. The effort will therefore have to be greater.
It is likely that reducing spending, particularly at the level of the state superstructure, will be the lever activated as a priority so as not to be completely at odds with the campaign. There are in any case numerous avenues for reducing the deficit:
· Eliminate a large part of the 1,200 state agencies and their local variations whose usefulness is more than doubtful and which generate expenditure of more than 80 billion euros per year.
· Systematize public-private partnerships wherever possible, in particular for the energy transition of communities and the health sector.
· Introduce three VAT rates: a 5.5% VAT on basic goods and energy, a 25% VAT on luxury goods and a 22% VAT on everything else.
· Reduce state grants to communities so that they reduce their operating budgets. In exchange, we must loosen the grip that rests on them, particularly at the level of the territorial climate-air-energy plan.
· Rationalize the territorial presence of the State: eliminate sub-prefectures where they are not necessary and merge small municipalities.
· Recover money from big companies that are in tax havens. According to the Missing Profits project led by the University of California, Berkeley and the University of Copenhagen, 22% of corporate taxes escape the state because of tax havens… which are often European, like Cyprus and Malta . Diplomatic pressure tactics exist
· Consider an exceptional and temporary tax on superprofits, part of which would go directly to replenish the state coffers and another part of which would go to fund the funds of private equity which finance businesses, and therefore the real economy.
· Partially privatize, for example SNCF and La Poste.
· Review all subsidies granted to associations and partners outside the EU.
· Establish a golden rule which obliges all administrations, with the exception of those relating to the sovereign, to allocate 30% of the budget to projects aimed at increasing productivity gains. This will increase tax revenues in the long term.
On the other hand, we must be aware that most of these measures will have a negative effect on economic activity in the short term. Public spending was an important supporting factor for GDP growth in the first quarter. Therefore, it is likely that the government’s GDP growth target of 1% this year will not be achievable – we can instead count on 0.8%.
Given the state of our public finances, if the RN wins, it will have no choice but to maintain a credible trajectory of the debt and deficit because the financial markets will not forgive it anything. In other words, he is forced to succeed where others have failed.
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