Public finances: why the “whatever it takes” continues to ignite the debt

Public finances why the whatever it takes continues to ignite

The “whatever it takes” is not dead, it even still lives. These political choices have consequences on public finances which are not to the taste of the Court of Auditors. The Elders of rue Cambon urged the government on Thursday March 9 to initiate a “resolute recovery” of public finances damaged by the energy crisis. They have crushed an “unambitious” trajectory of debt reduction which, on the contrary, risks widening, according to them.

After the tens of billions of euros spent to help households and businesses cope with the health crisis, the year 2022 was to mark the end of the expensive “whatever the cost”. It was without counting on the war in Ukraine and the surge in energy prices which led the government to put its hands back in the wallet, even if the executive makes the reduction of public expenditure one of its main priorities for 2023.

“The energy crisis has extended the period of massive public support for the economy and households, synonymous with a still very high public deficit and debt”, notes the Court of Auditors in its 572-page annual public report, submitted to President Emmanuel Macron before his presentation to the press this Friday, March 10 in the morning. “It is therefore essential to put in place a strategy that combines resolute recovery of public finances and recovery of the growth potential in the medium term”, she adds.

“The emphasis must be resolutely placed on controlling expenditure, that is to say definitely getting out of ‘whatever the cost'”, declared the first president of the Court of Auditors, Pierre Moscovici, presenting the report to the press.

Debt “which could paralyze public action”

The Court of Auditors has identified 37.5 billion euros in expenditure linked to the health crisis and the recovery plan in 2022, and still 12.5 billion in 2023. We must add the measures taken subsequently to cushion the inflationary shock which represented 25 billion in 2022 and 36.3 billion in 2023. Public finances “were already degraded before the Covid-19 pandemic, but in our opinion, they now call for urgent measures”, said Pierre Moscovici.

“The recovery of public finances […] must be a national priority,” he added. “France is not bankrupt. But we have a debt which is becoming very problematic, which could paralyze public action”, he also warned in the columns of the Echoes.

The Court of Auditors also points to tax revenues that will be less dynamic in 2023 while public spending continues to grow. France has one of the highest levels of public spending in the euro zone (57.7% of GDP in 2022 and 56.9% in 2023).

If the tariff shield on electricity and gas, discounts at the pump or even the energy check have enabled France to post the lowest inflation rate in the euro zone in 2022, these measures represent a cost net of nearly 43 billion euros over two years, to which are added another 50 billion in health expenditure and economic recovery, she notes.

All against a background of slowing growth. After 2.6% in 2022, the executive is counting on a gross domestic product (GDP) up 1% this year, a more optimistic forecast than those of the IMF or the Banque de France.

France, one of the worst students in the euro zone

The picture looks bleak in 2023. Bercy forecasts a public deficit of 5% of GDP, while the expected public debt is 111.2% of GDP. “The situation of France’s public finances will thus remain in 2023 among the most degraded in the euro zone”, far from the objectives set by the European authorities, tackle the Elders of rue Cambon.

However, the path to reduce them by 2027, set in a public finance programming bill rejected by Parliament, is “unambitious”, they lament. By this time, the government intends to reduce the deficit below the European limit of 3% of GDP, i.e. two years or more after the other main economies of the euro zone, while the debt is expected more or less at the same level ( 110.9%).

These objectives are also at risk of being derailed, the assumptions used to achieve them being considered “too optimistic”, whether in terms of growth, changes in interest rates or public spending. “If one of these assumptions were to prove too favorable, the objective of inflection of the debt ratio by 2027 would not be achieved”, warns the Court. Worse, the debt would widen, up to 115% of GDP according to her.

The “limited” effectiveness of the annual public expenditure review

The Court of Auditors considers the annual review of public expenditure by the executive to be insufficient. This was announced in January 2023 by the Minister of Economy and Finance Bruno Le Maire in order to identify sources of savings, but the pension reform relegates this project to the background.

According to the Court of Auditors, such approaches to an annual review of public expenditure have shown “limited” effectiveness in the past. Wishing to be associated with such an approach, she calls for “a profound culture change” by showing “selectivity in spending as in discretionary reductions in compulsory levies”. “The public expenditure review consists of getting everyone on board. Its first objective is to have a better quality of public expenditure. If it is a purely budgetary exercise, it does not work”, warns Pierre Moscovici to Echoes.

Highlighting the overhaul of unemployment insurance and its pension reform project, as well as now the increased targeting of support on the most modest, the government assures that “the pace of adjustment adopted makes it possible to initiate normalization at the both resolute and credible public accounts”, in its integrated response to the report.

The sages of rue Cambon also underline the need for France to adopt a multi-year public finance planning law, the absence of which, according to them, poses a risk to the collection of European funds, expected at 12, 7 billion in 2023.