the government’s objective more credible than expected?

During the presentation of the new budgetary stability program in mid-April, the country’s main economic organizations were very skeptical, once again pointing the finger at the government’s optimism. But the announcement of growth figures for the first quarter of 2024 by INSEE this Tuesday may have changed the situation.

What if Bruno Le Maire had, this time, hit the nail on the head? After the announcement of a public deficit much higher than expected in 2023, linked to insufficient tax revenue, Bercy had to fundamentally modify its budgetary stability program for the period 2024-2027 and urgently realize 10 billion savings.

The objective of reducing the public deficit below 3% of GDP at the end of the five-year term is maintained but short-term forecasts have been revised downwards. By the end of the year, the government wants to reduce the deficit to 5.1% instead of the 4.4% initially planned (which already implies 10 billion euros in additional savings this year) and is banking on annual growth of 1% instead of 1.4%.

1%, still too optimistic?

Problem is, the majority of economic forecasting organizations still consider this outlook too optimistic. They are instead banking on growth of 0.6 to 0.8% over the year. However, on Tuesday, INSEE surprised everyone by announcing an increase in activity of 0.2% in the first quarter, while the institute itself envisaged zero growth. Enough to satisfy Bruno Le Maire who sees this as proof that “the French economy is not at a standstill” and that the government strategy is the right one. With a 0.2% increase in activity in the first quarter, the objective of annual growth of 1% seems, it is true, a little less unrealistic.

But it will nevertheless be difficult to maintain, according to Sylvain Bersinger, chief economist at the Asterès firm: “We would need around 0.3% growth over the next three quarters, we will probably be a little below that. But 1% is not enough. It’s not totally unreasonable: we see business investment holding up well. Inflation is really continuing its downward trend, therefore, purchasing power gains for households. And with the fall in interest rates. which is looming, we can hope for a small stimulation of growth.”

The latter is all the more crucial as it generates tax revenue. With the reduction in public spending, it is one of the two levers that the executive wants to activate to control its deficit, as Sylvain Bersinger points out: “The deficit scenario of 5.1% of GDP at the end of the year is notably built in connection with the growth forecast. So if instead of 1% we have 0.6, 0.7, well indeed the deficit will be a little higher than what was planned.

On this level, the government no longer has the right to make mistakes. Especially since the deficit has already peaked at 5.5% at the end of 2023 instead of the 4.9% announced. To maintain the winding trajectory which should bring the deficit below 3% of GDP by 2027, it must already achieve 10 billion euros in additional savings in 2024, and at least as much in 2025. Suffice to say that the slightest slippage in growth or the deficit would definitively bury the hypothesis of a return below 3% of GDP in 2027.