France: Expansive Fiscal Stimulus Plans Critical to Raise Growth and Support Public Debt Burden

It is essential that the France Relance and France 2030 funds be invested effectively to boost critical innovation and investment and further support an ambitious structural reform agenda that meaningfully lifts France (AA/Stable)’s growth potential, easing medium-run pressure on fiscal and credit outlooks.

After one of the deepest economic contractions (-8%) among advanced economies in 2020, the French government has announced two large-scale stimulus programmes to support the economic recovery: The EUR 100bn (4% of GDP) France Relance recovery plan and the EUR 30bn (1% of GDP) France 2030 investment plan.

We see these investments, in their timing and composition, as positive for France’s credit outlook as they may contribute around +1% to growth this year and in 2022.

France’s economy already returned to its pre-pandemic level in Q3 of this year, ahead of Germany.

Concrete roll-out of these programmes key in determining their ultimate growth impact

But, as is often the case, the concrete roll-out of these plans will be indeed key in determining their ultimate impact on medium-run growth.

The French Treasury estimates that France Relance will raise the level of output by +0.9% over the long run, broadly in line with the European Commission’s November projections of around +0.6% and +1.0% by 2024.

However, past public investment programmes fell short of delivering on their promised outcomes.

As highlighted in an October 2021 Cour des Comptes report, heavy administrative burden led to delays in disbursement of the funds while a lack of robust, macro-level evaluation of the economic impact of investment prevented optimal reallocations. We thus welcome the increase in transparency and decentralisation of the new plans’ governance frameworks.

Focus on tackling long-standing economic bottlenecks is positive

In addition, the focus on tackling some of the French economy’s long-standing economic bottlenecks is positive. French industry has long suffered from a competitiveness gap stemming from elevated costs and weak performance in high technology sectors.

France Relance’s investments in the green transition (EUR 30 bn), competitiveness and innovation (EUR 34 bn), including a decrease in taxes on production and equity injections for small and medium-sized enterprises, and social inclusion (EUR 36 bn), appropriately target some of these structural issues. In addition, France 2030, designed to complement France Relance, aims to support France’s high-tech industries and reduce an economic dependence on key imports, such as raw materials and micro conductors. These measures together with funds targeted at raising workforce digital skills and the push for innovative sectors, such as green hydrogen, could improve economic competitiveness.

Risk the programmes nonetheless fall short of reversing deterioration in public finances since Covid-19

While design of France Relance and France 2030, including improved governance structures, reduces the risk of repeating past mistakes, there remains a risk these plans nonetheless fall short of sufficiently raising the nation’s growth potential to offset the deterioration in public finances after the Covid-19 crisis.

After a period of gradual, albeit sustained fiscal deterioration since the global financial crisis, the Covid-19 shock materially increased the debt-to-GDP ratio to 115.1% in 2020 from around 98% in 2019.

In view of France’s poor track record of budget consolidation, with the last primary surplus recorded in 2001, raising growth potential is all the more important to sustaining elevated government debt levels.

Based on our estimates, which include a slight upside revision to economic growth potential to around 1.5%-1.75%, the debt-to-GDP ratio is likely to hover around 115%-120% over the coming years, as the budget deficit is unlikely to decline to levels of under 3% of GDP until after 2026.

France’s public debt trajectory contrasts with that of most euro area peers that will place their debt on a firm declining trajectory over the coming years. The upcoming elections and resulting ability of the next government to sustain reform momentum will prove critical as meaningful public expenditure reductions are unlikely.

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Alvise Lennkh is the Deputy Head of Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, co-wrote this article.