Although the country has already experienced such degraded public accounts a few times, this has never happened before in a period of growth and falling unemployment. The inflationary crisis and the increase in local authority spending have defied all predictions for the past two years.
This time there is a fire in the public finances. While the country still does not have a government, a document from the Ministry of Economy points to a new and worrying drift in public deficits.
After the 2023 slippage, the public deficit is set to widen again. According to the budget document revealed by Bercy to a few deputies, it would reach 5.6% of GDP against an anticipation of 5.1%.
If nothing is done to correct the trajectory, it will even soar to 6.2% in 2025 compared to 4.1% targeted by the government.
France has already experienced an imbalance in public accounts beyond 4% of GDP. Twice, if we only take the primary balance (excluding debt service) and three times if we take the overall balance. But each time, these were periods of very severe economic depression. In 1993, when GDP fell by 0.6% in a context of global recession following the financial crisis of 1987. Then in 2009 and 2010 in the wake of the subprime crisis. And finally, of course, in 2020 with Covid.
But the current deficit is unprecedented. French GDP grew more than expected in the second quarter and growth is forecast to be 1.1% for the year as a whole. In addition, unemployment figures have improved in 2024 with the rate falling to 7.3% of the working population, almost its lowest level in 40 years. In this context, it is difficult to say that France is in crisis, which would explain the deterioration in public accounts.
And yet the state of the public accounts would suggest that the country is going through one of the worst recessions in recent decades.
Tax revenues in decline
The government puts forward two reasons to explain this imbalance. First, tax revenues are lower than expected, and this for the second year in a row. For two years now, the elasticity of revenues in relation to activity has reached abnormal levels. In concrete terms, this means that growth is increasing faster than expected tax revenues. Which is very rare in theory since over long periods, the elasticity level is 1. For the past two years, it has been below 0.5.
Why? Because major providers of tax revenues are not there. Consumption is not picking up, which is hampering VAT revenues. The same goes for real estate and construction. The sluggishness of the sector for more than two years is weighing down revenues and public accounts. Finally, there is the profitability of companies which has been affected by the increase in costs and in particular salaries, which has reduced corporate tax revenues.
At the root of these fiscal setbacks, we obviously find inflation. The rise in prices has eaten into companies’ margins, slowed consumption and caused an increase in interest rates which in turn anaesthetised investment, particularly in real estate.
The phenomenon is also found throughout Europe with an average deficit in the eurozone that has widened to 3.6% of GDP on average. Thirteen countries had a deficit of less than 3% of GDP in 2023. Even the very rigorous Germany saw its public deficit climb to 2.5% of GDP, 4 points more than in 2019 (the country had a positive balance that year).
If the French deficit is larger, it is because, on the one hand, it started from a higher level and, on the other hand, there was no control over spending while inflation was falling.
Mainly in local authorities such as municipalities and departments. At the beginning of the year, Bercy wanted to make its budgetary transfers to local authorities conditional on expenditure reduction targets, but was refused by the Head of State. Result: operating expenses in decentralized administrations jumped by 7%, or 7.5 billion euros more since the beginning of the year.
France, champion of public spending
The current resigning government has already committed to several billion in savings, but they are still insufficient to restore the budgetary trajectory. 60 billion euros would need to be found by 2025 to reach the target of a 4.1% deficit.
How to straighten out the accounts? Cut spending or raise taxes? All without a government and no absolute majority in the Assembly. The task looks impossible.
The economic logic would be to tackle spending. France is by far the country in Europe with the highest level of public spending. According to Eurostat, it reached 58.3% of GDP in 2023, almost 10 points above the European average. For the Head of State, this path has so far been ruled out. In the mind of Emmanuel Macron, the French social protection model is sustainable by increasing the employment rate and pursuing a pro-business policy.
In an inflationary context and with complicated access to credit, this policy has shown its limits in terms of budgetary balance.
The other solution would be to increase revenues, and therefore taxes. This would involve eliminating tax credits, increasing VAT rates, introducing new income tax brackets or even imposing a higher tax on transfers. There is no shortage of ideas.
This consists of in fine to increase the rate of compulsory collection in France. As a reminder, here again the country stands out at the European level with the highest tax pressure. In 2022, according to INSEE, the collection rate was 48% compared to 41% on average in Europe. The increase in taxation is not without consequences on activity and therefore tax revenues.
