France’s Fiscal Consolidation is Challenged by Rigid Spending, Uncertain Reform Agenda

A stronger commitment to budgetary consolidation has to be set against the delayed benefit of growth-friendly, supply-side reforms due to successive external shocks, and the uncertainty over measures to reduce public spending.

Rather than a decline in debt-to-GDP that the government forecasts, Scope Ratings expects a moderate rise to around 112% in 2028, slightly more conservative than IMF projections but below the government’s projection in a no-policy-change scenario.

For its part, the government wants to reverse about a quarter of the increase in debt-to-GDP that occurred between 2019-22 – the result of measures to reduce the impact of the pandemic and inflation shocks – by 2027.

This corresponds to a reduction in debt of 3.7pp of GDP on a cumulative basis over the period compared with 2022. This trajectory would leave France with debt-to-GDP of 108.1% in 2027, more than 10pp above where it was in 2019.

The plan is more ambitious than the target set in April when the government aimed to reduce debt by only 3.3pp (Figure 1), though that was significantly more than the target of 0.6pp envisaged in September 2022.

Figure 1. France targets faster deleveraging that is still modest compared to Covid debt
Change in debt-to-GDP ratio between 2022 and 2027 on a cumulative basis (pp)

Government Recognises Importance of Bolstering Debt-reduction Commitment

This more ambitious deleveraging, concentrated in 2026 and 2027, is underpinned by the government’s stronger commitment to fiscal discipline through more regular and comprehensive government-spending reviews, regulatory measures, and cracking down on tax fraud. The enhanced governance framework for public finances could also contribute to rebuilding buffers, as could the newly established high council of public finances for local governments.

Still, consolidation efforts are modest in comparison with the European Commission’s fiscal rules proposal of April 2023 that, if adopted, would require (according to Bruegel) an annual 1.1% of GDP adjustment in the structural primary balance on average between 2025 and 2028. But this would imply either additional cuts in expenditure and/or tax hikes, neither of which are on the government’s agenda.

Faster Deleveraging Driven by Fiscal Consolidation in the Longer Run

The government’s expectation of a decline in the debt-to-GDP ratio to 109.7% in 2023 (down 2.1pp from the previous year) would primarily stem from phasing out measures to address the cost-of-living crisis.

The government then projects debt-to-GDP to remain broadly stable until 2025. Only in 2026-27 does it forecast cuts to the primary deficit, which would gradually reduce debt-to-GDP to 109.1% in 2026 and 108.1% in 2027. The efforts to rebuild fiscal buffers are projected to be partially offset by a rising interest burden.

Yet, the government’s forecast of a 2.7pp reduction in debt-to-GDP over 2022-26 is larger than the 0.6pp cut expected for Germany, and also more ambitious than the 4.6pp increase in the United Kingdom and 2.7pp in Belgium. It contrasts favourably with the 9pp increase expected in the United States (Figure 2).

Figure 2. France’s planned cut to debt-to-GDP is more rapid that sovereign peers’
Debt to GDP (%), change in debt to GDP on a cumulative basis (pp), Scope credit rating and rating Outlook in parentheses

Structural Pressures, Uncertain Fiscal Measures Test the Robustness of Deleveraging

Investment needs, considerable compared with planned expenditure savings, and spending rigidities will hinder the reduction of France’s primary deficits.

The 2024 draft budget includes a rise in spending of EUR 7.0bn for the green transition, EUR 5.6bn for education, and EUR 3.3bn for defence. Such expenditure is likely to grow further in the coming years whereas the government is yet to detail where efficiency gains will materialise.

Debt-funded Covid- and energy-crisis related support also have a long-term impact on public finances when borrowing costs are near their highest level since 2011. The government expects the interest burden to increase by 0.7pp over 2022-27 to 2.6% of GDP (EUR 74.4bn).

As the government has so far ruled out domestic tax hikes, revenues are primarily contingent on real GDP growth, which the government revised down to 1.4% for 2024 from 1.6% previously. This is still above our 1.0% growth projection for next year.

Political Obstacles Remain in the Way of Deeper Economic Reform

Structural reforms, including those on pension and unemployment benefit systems, support France’s GDP growth outlook. However, their positive impact will likely take more time to materialise due to the Covid pandemic and the cost-of-living crisis.

The introduction of more growth-enhancing supply side reforms also appears unlikely in the current socio-political context. Reform momentum could even fade further, partly related to the electoral cycle. The minority government of President Emmanuel Macron is preparing for European elections due next June, municipal elections in 2026 and presidential and parliamentary elections in 2027.

With an uncertain and evolving reform agenda going forward, the expectation that real GDP growth will run above potential between 2025 and 2027 – estimated at 1.35% by the government but only 0.8% by the European Commission – appears optimistic.

This is consistent with a weakening in public finances and implementation risks to the reform agenda that underpinned the Negative Outlook Scope Ratings assigned to France’s AA long-term ratings in May.

For a look at all of today’s economic events, check out our economic calendar.

Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Brian Marly, Analyst at Scope Ratings, contributed to writing this commentary.