The French government unveiled its latest stability programme on Wednesday, April 12. The purpose of this document, which is required in the framework of the European semester for Eurozone countries, is to present France’s public finance trajectory for a four-year period (2017-2020).
Due to the upcoming presidential elections, this multiyear path remains quite hypothetical. In fact, general government deficit projections and the underlying macroeconomic assumptions will probably be amended by the new government. Nonetheless, they are worth a closer look, because the trajectory, as well as the accompanying opinion from the French High Council of Public Finances (HCPF), will be a useful reference for the new government in place.
The stability programme presented last Wednesday projects a public deficit of 2.8% of GDP for 2017, then 2.3%, 1.6% and 1.3% of GDP for 2018-2020. This trajectory is based on real GDP growth projections of 1.5%, 1.6%, and 1.7%, and inflation projections of 1.1%, 1.4%, and 1.5% over 2018-2020. In March 2015, the European Council gave France additional time to reach the 3% threshold for public deficit. It recommended excessive deficit be corrected by 2017. If, as predicted, the public deficit actually came to 2.8% (or less) for 2017, it would be in compliance with the deadline granted by the Council to put an end to the excessive deficit and would help stabilize public debt.
With regard to the upcoming elections, there are three important points to stress regarding how the government balance will change beyond 2017. First, would GDP growth effectively come out below this programme's underlying fore-casts, the public deficit would be - all other things being equal - widened, due to lower general government revenues collected and the effect of automatic stabilisers. Second, this trajectory is based on potential growth estimates that the HPCF finds to be overstated. They therefore contribute to the estimate of a much wider output gap than the international organisations consider it, which "minimises the effort that must be taken to balance public finances in the medium term." Accordingly, a reduced estimate of potential growth by the new government (as recommended by the HCPF) would lead to an increase in the required structural effort to achieve structural balance or ensure compliance with European recommendations on the structural adjustment to be made. Lastly, this public finance path claims compliance with the European rules of the Stability and Growth Pact, which is not necessarily true of the presidential candidates' political programmes.
The stability programme's multiyear fiscal projections mark out a point of reference for the incoming government. It will be a benchmark for all: for the candidates who advocate for controlled public finances (François Fillon and Emmanuel Macron, aiming for a public deficit of 0% and 1% of GDP, respectively, in 2022), for Benoit Hamon (who recommends moving away from this trajectory with a return to 2.7% of GDP in 2022, and proposes the establishment of a new European treaty, considering a mutualisation of a portion of sovereign debts), and for those who want to cast off the European recommendations (Jean-Luc Mélenchon and Marine Le Pen).
The stability programme's multiyear public finance projections: a benchmark for presidential candidates?
Anne-Charlotte PARET, Strategy and Economic Research at Amundi