France’s Stability Programme: Sizeable Fiscal Support Followed by Gradual Expenditure Containment

France’s Stability Programme for 2021-27 highlights the government’s priority to support a strong post-Covid-19 recovery, close the output gap by 2024 and boost potential growth via fiscal support focused on greening the economy as well as on social cohesion and industrial sector competitiveness. Given already high shares of tax revenues in GDP, the government decided against tax hikes under the Programme to cover the Covid-19 bill, relying instead on gradual expenditure containment from 2022 onwards.

Following sizeable recovery spending reflected in nearly a 10% increase in real spending between 2019 and this year, post-crisis fiscal consolidation is expected to be jump started by a fiscal cut of 3.3% of GDP in 2022 as emergency support measures are tapered, and gradually phased in via containment of public outlays afterwards.

Specifically, the government aims at limiting annual growth of real public expenditures to 0.7% between 2022 and 2027. This is lower than the average growth rates of 2007-12 and 2012-17 periods of 1.4% and 1.0%, respectively, and also below projected real output growth.

Streamlining and digitalising public services

The government will continue to pursue streamlining and digitalisation of public services as outlined under the “Action Publique 2022” and focus on efficient public spending that favours more inclusive and green growth. In addition, the government plans to reform public finance governance by implementing a multi-year spending rule that limits general government expenditure growth. This can be exceeded only during times of crisis and after close parliamentary scrutiny.

A gradual consolidation approach concentrating on the expenditure side is appropriate

The government’s plan to gradually reduce the fiscal deficit via expenditure-based consolidation is appropriate since this tends to be more effective than revenue-based plans. This will help place the economy on a sound post-crisis recovery path. Any premature rapid consolidation would likely hold adverse implications for growth and could weigh upon longer-term debt sustainability. However, this gradual approach to consolidating the budget will come at the cost of materially weaker fiscal fundamentals at a minimum over the medium term.

France’s projected primary fiscal balances are weaker than those of most other euro area countries, albeit similar to or stronger than those of Scope’s other AA-rated sovereigns such as Belgium, Czech Republic, the United Kingdom or the United States.

The budget deficit is expected to remain elevated

The French budget deficit is expected to stay elevated, at 4.6% of GDP on average, over the next seven years and is forecast to fall to below the 3% of GDP Maastricht threshold only by 2027. This includes the fiscal impact of France’s EUR 100bn recovery plan, on top of a gradual withdrawal of support measures implemented to address Covid-19. Similarly, the public debt ratio will stabilise at 118% of GDP only in 2024-26 and start declining by 2027 absent a substantive economic shock in the interim years.




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