Bercy has let the public deficit slip and is pointing the finger at local finances. In reality, these are sticking to their budget and are weakened by the deteriorating economic conditions.
“An extremely rapid increase in local authority spending”: in a letter addressed to the general rapporteurs and the chairmen of the Finance Committees of the two assemblies, the resigning Minister of Finance Bruno Le Maire and the resigning Minister Delegate for Public Accounts Thomas Cazenave bluntly accuse the municipalities, departments and regions of the new slippage in the public deficit – now expected at 5.6% this year.
If Bercy also deplores lower than expected revenues, particularly concerning VAT, the local authorities are therefore accused of not holding the purse strings. However, the public deficit is calculated by taking into account three data: those of the State accounts, those of the social security accounts, and those of the accounts of the municipalities, inter-municipalities, departments and regions.
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While the State is very largely in deficit (more than 150 billion euros) and the various branches of social security are also showing deficits, local authorities are showing contrasting results, as the Court of Auditors notes in its latest report.
“The financial situation of municipalities and inter-municipalities has continued to improve (+€1.2 billion in gross savings). On the other hand, that of the regions is in decline (-€0.4 billion) and that of the departments has deteriorated (-€4.7 billion).”
We reason in terms of “gross savings” because communities are subject to strict budgetary rigor.
“The golden rule has always applied to communities. They need savings to cover their expenses, it’s the law,” explains Romain Colas, PS mayor of Boussy-Saint-Antoine (Essonne) and vice-president of the Association of Small Towns of France (APVF).
Cities, departments and regions must therefore preserve their accounts and compensate for any losses with their savings: they do not have the right to borrow to finance operating expenses, such as salaries. They can only borrow if they have the necessary funds in their coffers, and only to invest. It is therefore difficult to speak of an uncontrolled skid.
Inflation, economic situation
In detail, expenditure has indeed increased, by 6% in one year according to the Court of Auditors. This is for multiple reasons, starting with inflation: it has powerful effects on the price of purchases by communities (energy, water, heating and food for canteens), or on the price of debt, due to the rise in interest rates, which makes the burden of debt heavier.
In addition, the revaluation of the civil servants’ index point (+1.5% in 2023 after 3.5% in 2022), decided by the government, has weighed on local authorities by increasing salaries by 4.7%. The increasing use of contract workers, due to a shortage of labor as much as a desire to make staffing more flexible, is also costly since it leads to paying more.
Inflation also has significant indirect effects: by leading central banks to raise interest rates, it has paralyzed the real estate market. However, transfer taxes (DMTO), taxes collected when a property is sold (they are part of “notary fees”), are one of the main resources of the departments. Falling by 4.5 billion euros in 2023, they explain most of the shortfall, all communities combined, last year.
The Court of Auditors itself pointed out in July “the inadequacy of the financing of the operating costs of the departments, mainly made up of rigid and evolving social expenditure, by a cyclical and volatile tax.”
Disadvantageous tax reforms?
Several tax reforms carried out by Paris have also increased spending and weighed on revenue. The abolition of the housing tax, for starters: while part of the revenue went to the departments and the other to the municipalities, it is now the State that compensates by transferring parts of its VAT revenue to both levels.
Similarly, the reform of production taxes, long demanded by employers, has deprived regions and municipalities – with the disappearance of the Contribution on the added value of companies (CVAE) – of a significant resource. It is offset by VAT, again paid by the State. In 2022, the VAT paid had increased by 9.4%; it was only 1.9% in 2023.
The Court of Auditors explains that the CVAE reform was favourable, and that the terms of compensation by VAT brought 2 billion more to the communities; which is refuted by the Association of Mayors of France (AMF), citing a shortfall of 750 million euros for all the communities.
Unsustainable model
These reforms mainly weaken the dynamics of local authorities’ expenditure and revenue. Departments, in particular, are deprived of any possibility of increasing taxes to compensate for unforeseen or incurred expenses, since the end of the housing tax.
“The departments now have revenues that depend on the economic situation, such as DMTO or VAT, but are responsible for universal benefits. It’s extremely toxic: for example, they often have to pay more social benefits when the real estate market is not profitable. It’s a vice,” explains Romain Colas.
A situation denounced by the French Departments in July, when Bruno Le Maire demanded an additional 2 billion in savings from local authorities.
“If he wants local authorities to slow down their spending, he should start by reducing the spending he imposes on them!”, scolded François Sauvadet, president of the association and former Minister of the Civil Service.
“Of the 2 billion, the Departments can actually contribute up to 770 million. They just need not to apply the 4.6% increase in the RSA on April 1 to save 500 million and leave the State to assume alone the consequences of the agreement on those forgotten by the Ségur to add 270 more. Solidarity has a cost that must be assumed. Making others bear the fine promises that we know are untenable only sends us all into the wall while honking our horns,” he continued.
The municipalities, however, are doing better: they still have the weapon of property tax, which they can adjust to generate the right level of revenue. Not only is the property tax adjusted to inflation, but its rate is adjustable.
Compensating for state losses
The last element to convince Bercy to bang its fist on the table: the increase in investment spending. Although local authorities have drawn on their savings in 2023, they have continued to invest, to the tune of 72.8 billion euros, an increase of 6.6%, reports the Court. The municipalities are the biggest spenders (+9.3%) but even the departments continue to bet (+2.6%).
The executive takes a dim view of these additional costs, which translate into additional debt. It intended to maintain the level of investment at the 2021 level. “During the Public Finance Conference organized in June 2023, Bercy took the pandemic period as a reference. But we spent less – everything was closed! There is a catch-up effect,” explains Romain Colas.
Since the implementation of its public finance programming law for the years 2023 to 2027 – which was to reduce the deficit to 2.7% at the end of the five-year term – the government has been counting on a reduction in local authority spending, of the order of 0.5% per year (excluding social benefits and spending related to children). Enough to invest, precisely, and contribute to the recovery of public finances: it is indeed a question of helping the State.
“What we are being criticized for is not financing the State deficit,” Romain Colas emphasizes.
The government estimates that the local authorities, which are less profitable than expected, will cost 16 billion euros this year. Not in additional expenditure, therefore, but in loss of revenue for the State.
Bruno Le Maire takes responsibility for it: he recalls behind the scenes, report our colleagues at Les Echos, that he was in favor of a corrective finance law in the spring, which would make it possible to condition state grants to local authorities on a budget surplus for these communities. No such control currently exists.
Grants represent approximately 30% of local authority revenues. The latter, for their part, denounce their non-indexation to inflation.
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