PUBLIC

FINANCES:

SITUATION AND

OUTLOOK

Summary report

July 2024

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Summary report

2023 was a very bad year for public finances. The public deficit, far from being reduced,

stood at 5.5 points of GDP, 0.7 points lower than in 2022 and 0.6 points higher than the

government forecasts. France has not taken advantage of the gradual normalisation of the

economy or the fall in prices after the peak in inflation.

This situation has effectively rendered obsolete the trajectory of the Public Finance

Programming Act (LPFP) for 2023-2027 adopted in December 2023 - the other provisions of

which (three-year capping of State spending per policy area, correction mechanism, capping

of exemptions from social security contributions, etc.) remain essential for the governance of

public finances - and has obliged the Government to present a new multi-year trajectory in the

stability programme communicated to the European Commission on 17 April. It will be up to

the next Government to prepare the autumn financial texts and the national medium-term

budgetary and structural plan prescribed by the new European rules on the basis of its

assessment of the objectives and milestones of this programme. In the meantime, the current

stability programme remains the most recent expression of France's commitments in terms of

public finances and is therefore the necessary reference point for assessing the prospects for

returning the public deficit and debt to a sustainable path.

Given the starting point created by the record deficit in 2023, and independently of the

context described above, this trajectory, which is not very ambitious in its deficit and debt

targets, with a return of the deficit to below 3 % only at the end of the period in 2027 and a late

stabilisation of the public debt ratio at a higher level than in 2023, raises a question of credibility.

In addition to being based on over-optimistic growth assumptions, it assumes both

unprecedented savings in spending (which would amount to €50 billion compared with current

spending trends) and significant increases in mandatory contributions, which are not specified.

Assuming that they could be achieved, it would be difficult to reconcile them with the stated

levels of growth.

The alternative scenarios tested by the Court of Accounts show that any deviation from

the growth, expenditure or revenue forecasts would be enough to derail the trajectory and miss

the deficit and debt targets for 2027.

France's public finances are therefore in a worrying state. The divergence with the main

European countries is becoming increasingly marked and sets France apart even more at a

time when the new European budgetary governance is being put in place and the European

Commission has announced that it will propose opening an excessive deficit procedure against

France. As a result of putting off genuine structural adjustment efforts, France's public debt is

becoming increasingly onerous as a result of repeated deficits. This is constraining all other

expenditure, hampering the country's ability to invest and leaving it dangerously exposed in

the event of a new macroeconomic shock.

The situation is made even more worrying by the fact that the multi-annual programming

of public finances does not fully take into account the challenges posed by global warming and

the energy transition, even though the commitments made under the Paris Agreement, and

reiterated in the European framework, must be met by 2030, a timeframe that is now very

close. However, whether in terms of growth, investment or erosion of tax revenues, this

transition has a cost that will inevitably weigh on public finances and that has not been taken

into account at this stage. What is needed, therefore, is a genuine integration of the energy

transition into the programming of public finances and a clarification of the distribution of efforts

between the public sphere (State, local authorities and social security administrations) and

private players (households and businesses).

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In this situation, where France must take difficult decisions in order to maintain control

over its public finances and honour its commitments not only to eurozone members but also

to future generations, the Court considers it essential to make a determined effort to reduce

the public deficit in order to put the debt back on a downward trajectory. If this effort is not to

be counterproductive and detrimental to growth and social cohesion, it must be credible,

effective and shared: credible, by being underpinned by sustainable reforms, identified in

particular as part of the expenditure reviews initiated in 2023; effective, by focusing on the least

relevant expenditure as a priority and by explaining the expected contribution of tax increases,

particularly in relation to carbon taxation; shared, by clarifying its distribution between

households, businesses and public administrations - and, within the latter, between the State,

social security and local authorities.

The dual financial and climate debt accumulated over decades is not an abstract issue

in the distant future. It is already tangible, and it is all the more difficult to deal with it as the

measures to limit the deficit and contain the debt have been delayed.

2023, a very bad year for public finances

While our main European partners managed to stabilise (Germany) or even significantly

reduce (Spain, Italy) their public deficits and, for the first time since the outbreak of the health

crisis, no exceptional event disrupted economic activity, the French deficit reached

€154 billion, 0.7 points of GDP worse than in 2022 and 0.6 points higher than the

Government's forecast.

Public deficit in the four largest eurozone economies since 2020 (in points of GDP)

Source: Eurostat

three factors: firstly, low spontaneous growth in mandatory contributions, which

nevertheless marks a form of normalisation after two exceptional years of post-Covid rebound;

secondly, the continuation of discretionary tax cuts amounting to more than €10 billion; and

thirdly, the absence of structural savings, as expenditure excluding the cost of debt and

exceptional measures continued to rise at a rate well above inflation.

As a result, public debt has reached €3,100 billion, more than €700 billion above its

pre- crisis level and now stands at almost 110 points of GDP.

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Public balance in 2022 and 2023 (€bn)

Source: Insee

This situation should have led to stronger adjustment measures for both revenue and

expenditure. While the State, faced with sluggish tax revenues at the end of the year, adhered

to its - unambitious - spending targets, this was not the case for the social security funds and

local authorities.

This very poor performance in 2023 will have a negative impact on 2024 and, beyond

that, on the entire 2023-2027 public finance trajectory, exceeding the LPFP target by almost

€50 billion.

Significant risks to the new public finance trajectory from 2024 onwards

As a result of the significant deterioration in the deficit in 2023 and the growth outlook for

2024, not only the nominal target but also the extent of the reduction in the public deficit have

been revised downwards in the stability programme compared with the programming act

(LPFP) adopted in December 2023: the deficit would remain above 5 points of GDP and public

debt would rise by 1.7 points in 2024, exceeding the LPFP target by almost €50 billion.

Without speculating here on the budgetary strategy to be proposed by the new

Government, this objective is far from being achieved, as it is subject to significant risks in the

context of the financial texts adopted at the end of 2023 and the economic context in 2024.

Assuming that it is not called into question, the first risk is that of not achieving the

objective of controlling public spending, which is based in particular on the €15 billion of

additional savings announced since February 2024 (not counting the €2 billion of savings in

local authority operating costs, already included in the LPFP). This risk appears high given the

lack of precision surrounding the measures envisaged, the scale of the allocation carryovers

from 2023 to 2024 for the State, the absence of any binding mechanism on local authority

operating expenditure and the uncertainties surrounding the achievement of the planned

savings in the area of health insurance. It also comes at a time when a number of factors are

pushing up spending (farmers' crisis, civil unrest in New Caledonia, organisation of the Olympic

Games, etc.).

This risk on the expenditure side is compounded by a risk on the revenue side, as the

proposed tax on rents, which is expected to raise €3 billion from 2024, has yet to be passed

into law, which will also have to comply with constitutional requirements on retroactive taxation.

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Breakdown of the change in the public balance between 2023 and 2024 (in GDP points)

Source: 2024-2027 Stability Programme, restated by the Court of Accounts

Therefore, after the significant deviation in 2023, the targets for 2024 must be made

credible by dispelling the vagueness surrounding the savings and tax increases they imply. At

a time when the reform of the Stability and Growth Pact is coming into force this year and

France will once again be subject to an excessive deficit procedure, it would be to France's

advantage to take the lead and clearly set out the reforms it intends to implement to meet the

adjustment path required by its European commitments.

The path to 2027: unrealistic targets

As a result of the very marked deterioration in the public deficit from the start of the period

covered by the LPFP and the poor growth prospects, a deficit target of just under 3 % in

2027 has been adopted in the stability programme, with public debt at that time still

1.4 points of GDP higher than in 2023.

This trajectory, which is below that of the other major European countries, is unrealistic.

Public deficit and public debt trajectory (right-hand scale), in points of GDP

Source: 2023-2027 LPFP, 2024-2027 Stability Programme

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Deficit targets for the largest eurozone countries (in GDP points)

Source: Stability programme and update of macroeconomic and budgetary forecasts by the

Spanish government

The underlying growth assumptions are particularly optimistic and do not seem to take

into account the depressive impact of the planned increases in mandatory contributions

(+€21 billion over the period 2025-2026) and an unprecedented slowdown in public spending

(with a rise in volume excluding interest charges and non-recurring measures of +0.2 % per

year on average over the period 2025-2027).

This dual effort in terms of expenditure and revenue, irrespective of its effects on growth,

seems all the more unrealistic at present because it is not supported by documentation. In

particular, there is nothing to suggest at this stage that the spending goals, which have been

stated at this level in the past but never fully achieved, will be fully realised this time around by

2027.

For the past two years, each new multi-year trajectory has appeared more fragile than

the previous one. The Court has quantified three alternative scenarios: weak growth, in line

with the quarterly rates observed over the past two years, and not at the level forecast by the

Government for spring 2024; constant mandatory contributions; and spending that would

develop at the same rate as in the years 2015-2019. All three of these factors mean that the

public deficit will still be well above 3.0 % in 2027, with debt continuing to rise.

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Scenarios for changes in public debt (in points of GDP)

Source: 2024-2027 Stability Programme, Court of Accounts adjustments The "1 % growth"

scenario assumes effective growth of 1.0 % per annum over the period 2025-2027. The "trend-

based spending" scenario assumes that primary expenditure, excluding exceptional support

measures, will grow at the same rate as before the crisis. The "stable mandatory contributions"

scenario assumes no new measures to increase OP over the period 2025-2027. The cumulative

scenario takes into account all the assumptions of the three previous scenarios

It is crucial, as set out in the current stability programme, to return the deficit to below

3 % and to put public debt back on a downward trajectory; but this effort must be undertaken

on the basis of more realistic and credible forecasts than is currently the case.

This effort is all the more essential given that public finance programming does not yet

take into account the foreseeable consequences of global warming and the energy transition,

while the Paris Agreements and the European objectives have the year 2030 as their first

imperative milestone.

The impact of climate change and the energy transition needs to be

factored into public finance planning

Under the Paris Agreement, translated into European legislation, France is committed to

reducing its annual greenhouse gas emissions by 139 million tonnes between 2022 and 2030,

an effort of the same order of magnitude as that made between 1990 and 2022, in order to

achieve a low-carbon economy by 2050.

The additional investment needed to mitigate climate change and make the transition to

a low-carbon economy is estimated at more than €60 billion per year by 2030, a burden that

will have to be shared between households, businesses and public administrations on the

basis of explicit trade-offs, which are the only way to ensure that the appropriate instruments

are put in place to achieve this.

At national level, this transition must be based on a rational approach that involves

decarbonising our production and consumption patterns at the lowest cost to society as a

whole. In particular, this means giving priority to actions with the lowest abatement costs - i.e.

the cost per tonne of CO2 avoided - by stepping up carbon pricing, targeted subsidies and

proportionate regulations, subject to rigorous evaluation.

This strategy must also be reconciled with an extremely constrained public finance

trajectory, and with the necessary social acceptability and collective ownership of the

measures decided upon.

The financing capacity of public administrations is particularly tight, and made even more

tenuous by the expected erosion of fuel tax revenues and by the negative impact of global

warming and the transition on economic growth, estimated at one tenth of a percentage point