It is not a surprise, the government has announced, since February, numerous cuts in public spending to try to reduce a debt which has soared. However, it is important to fully understand the reasons for this progression in order to provide adequate responses in terms of public policies.
Measured as a percentage of gross domestic product (GDP), that is to say the wealth created, public debt increased from 100 to 117% between 2020 and 2021. But after this increase at the height of the health crisis, it has declined since the start of 2021, reaching 114% of GDP at the start of 2023. This decline is largely due to inflation, the effects of which on the state budget have just been analyzed by the High Council of Public Finances (HCFP).
Quite mechanically, during periods of inflation, the value of the wealth produced increases. As a result, the debt expressed as a percentage of GDP will then decrease. This phenomenon has been observed in all European countries. “Part of the debt has disappeared thanks to inflation”summarizes Henri Sterdyniak of the dismayed economists, heard at the beginning of June at the National Assembly.
This effect, however, took on varying proportions depending on the Member States. Indeed, in countries where inflation was the highest, this mechanical effect helped to reduce the debt ratio of the country concerned more significantly. However, inflation in France has remained more contained than among our European neighbors, in particular thanks to the tariff shield.
Furthermore, the impact of inflation on public finances is determined by a certain number of other parameters specific to each country.
The first step is to assess the impact of inflation on public revenue. In theory, it increases them since an increase in prices induces an increase in VAT revenue, and can a priori lead to an increase in wages, and therefore in social security contributions, if employees see their purchasing power evolve in the same proportions. than inflation.
In practice, in France, the elasticity of public revenues to inflation has been attenuated for one reason: the successive increases in the minimum wage which, unlike the rest of wages are indexed to the price level, have raised the wage level eligible for contribution exemptions (i.e. 3.5 SMIC).
As at the same time, the rest of non-indexed salaries did not follow the same pace as prices, leading to a crushing of the hierarchy of salaries close to the minimum wage, the cost of these reductions has “progressed by 15 % in 2022, at 68.3 billion euros and is expected to increase by 10 % in 2023, at 75.4 billion »estimates the HCFP.
The indirect effects of inflation
Public spending also tends to increase during periods of inflation, due to indexation mechanisms (on social benefits, salaries or pensions) which are triggered with a slight time lag.
However, they evolve less quickly than revenues, estimates the High Council of Public Finances: + 0.40% compared to + 0.95% for revenues when inflation increases by 1%. The analysis of the mechanical effect of inflation on revenue and expenditure therefore clearly shows a positive effect, although this was reduced in the case of France by the impact of contributions.
Public spending changes less quickly than revenue: +0.40% compared to +0.95% when inflation increases by 1%
Added to this first analysis are the indirect effects of inflation. These are linked on the one hand to the measures which have been put in place by the government to deal with them, and which have supported growth: up to 2.2 points over 2022 and 2023 according to the HCFP.
They are also linked to the undesirable effects of inflation on the economy. This is evidenced by the energy bill. From 2022, Germany has reduced the volume of its energy imports. Which was not the case in France:
“ The use of energy imports has increased despite the rise in prices », points out the High Council of Public Finances. Notably because, “ primary energy production, penalized by the low availability of nuclear power plants, has decreased more than primary consumption”.
Inflation also had an indirect effect on the cost of credit. Central banks, including the European Central Bank, react to rising prices by increasing their interest rates, which has an impact on the borrowing costs of both private actors (households, businesses) and the ‘State.
On the first point, the effect remained relatively limited in France due to “the structure of household and corporate debt composed mainly of fixed-rate, long-maturity loans”, specifies the HCFP. While in other countries, like the United Kingdom, households suffer greatly from rising rates due to the predominance of variable rates.
Government responsibility
On the public borrowing side, on the other hand, France was penalized by the relatively high share, in its debt, of bonds indexed to inflation (known as OATi), the cost of which we had already highlighted in our columns.
In total, inflation would have contributed in France to reducing the debt ratio by 9.5 points between 2021 and 2023. But this was actually reduced by only 2.4 points over the period, points out the HCFP. And to insist on the fact that France has therefore not completely benefited, over the last two years, “of the inflationary shock and the windfall that it was able to constitute to reduce its debt ratio”. The fault, according to the High Council, is a public deficit that is too high.
If it is not inflation which has contributed to keeping our deficit in the red and increasing our debt, we must therefore look for other explanations. According to the French Observatory of Economic Conditions (OFCE), half of the increase in our debt since 2017 (+ 911 billion euros) would be linked to support measures decided in the face of different crises, starting with that of vests. yellow. This percentage rises to 70% if we consider the post-covid recovery plan as part of these exceptional measures.
This argument is often used by the government, but it specifies much less that between 30 and 50% of the increase in debt since 2017 is due to unfunded budgetary measures. According to François Ecalle, honorary senior advisor to the Court of Auditors, former general rapporteur of the Court of Auditors report and author of the Fipeco blog, 30% of the increase in debt would actually be linked to government decisions to increase spending or decline in revenue since 2017.
The executive partly contributed to creating the situation which it now intends to remedy with brutal cuts in public spending.
