This ceiling of 3% of GDP was established on the basis of a double statement. Before the creation of the Economic and Monetary Union (EMU), when a single country led an expansionary fiscal policy, the potential disadvantages lied with it alone, while its partners mainly benefited (public expenditure to boost domestic demand was reflected in higher exports from its main trading partners). This is no longer necessarily the case in the Eurozone. Indeed, a country that alone leads a fiscal stimulus shares the effects with all members of the Eurozone, including the adverse effects: inflationary pressures, rising interest rates, appreciation of the exchange rate of the euro. The existence of these negative externalities justifies a strong coordination of fiscal policies or, failing that, the adoption of minimum rules to regulate fiscal policies, such as the obligation to maintain a public deficit of less than 3% of GDP. In addition, it is very difficult to set rules that directly affect the public debt to GDP ratio, as the evolution of this ratio depends on many factors and the initial situations of the euro area countries remained too heterogeneous despite convergence efforts. On the other hand, the respect of a constraint on the public deficit indirectly makes it possible to contain the evolution of the public debts, at least to ensure a stable trajectory on a given horizon.
France will therefore have to show efforts to the European Commission until 2019 to fall off the radar of the Commission. To do this, the forecasts of the French and European statistics institutes have to be in line with the constraints that stem from the EU PSC. In this regard, Bercy has revised its forecast of public deficit downward to 2.3% of GDP in 2018 and 2.4% in 2019, instead of 2.8% and 2.9% hitherto indicated. The European authorities will decide in May on the fate of France regarding the exit of the excessive deficit procedure. The European Commissioner for Economic and Financial Affairs, Pierre Moscovici, recalls that “the level of public spending” in French GDP is one of the highest in the world. “We are the only country where we still honor the 3%. It’s not a target, it’s an absolute limit! Our partners are 0.9% and probably a little less in 2018…”.
The positive momentum of growth has benefited France. Actually, when the economic growth improves, the government’s revenues, particularly the compulsory levies (taxes and contributions), increase much faster than the activity. In the details of the accounts, we can read that between 2016 and 2017, public expenditure increased by 2.5%, i.e., an additional 30 billion euros. But, at the same time, revenues jumped 4%, or 47 billion euros. This rise pushes the tax rate to a level never before reached of 45.4% of GDP, the second highest rate of all OECD countries, the first being Denmark with about 45.9% in 2016. However, the continuation of the implementation of structural reforms in France will not be easy. The negotiations will be difficult, and nobody will escape the concessions, neither the government nor the unions. Without national reforms, European ambitions could be slowed down again.
Julien Moussavi, Head of Economic Research