Opinion of the High Council of Public Finance on the third amending budget bill for 2020

On 4 June 2020, the Government referred the introductory article of the third draft amending budget bill (PLFR) for 2020 to the High Council of Public Finance for an opinion on the associated macroeconomic forecasts and on the coherence of this budget bill with the multi-year structural balance path defined by the Public Finance Programming Act of January 2018 (LPFP).

The High Council adopted this opinion after having deliberated on it at its meeting of 8 June 2020.

Opinion's summary

The high level of uncertainty resulting from the health crisis caused by the Covid-19 epidemic leads to frequent revisions of macroeconomic forecasts and of the Government's policy and fiscal responses. The High Council is thus asked, for the third time in less than three months, to give an opinion on a draft amending budget bill (PLFR) for 2020.

The High Council notes that the Government's scenario, contrary to the one presented in the previous PLFR, is no longer assuming a rapid return to normal activity, but forecasts that activity in the second half of the year will remain well below its level at the end of 2019.

Therefore, it considers the Government's forecast of an 11% decline in activity in 2020 to be cautious. Continued favourable trend in the health situation  and a higher utilisation in the second half of the year than assumed by the government of the constrained savings accumulated by households could lead to a less pronounced recession.
The High Council estimates that employment could be slightly higher than the Government's forecast, but inflation, on the contrary, could be slightly lower.

The High Council notes that the Government's deficit forecast stands at 11.4 points of GDP, a level not seen since the end of the Second World War. The deterioration of the deficit compared to the previous PLFR is the result of new spending, a sharp revision of the macroeconomic assumptions and more realistic forecasts for some previously decided public expenditures.

The High Council points out that more favourable macroeconomic developments could limit the widening of the general government deficit. On the contrary, it highlights that some of the measures presented as cash flow measures could finally have an impact on the deficit as early as this year and that not all the measures announced by the Government to support activity, in particular some sectoral stimulus packages, have been included in this PLFR.

It points out that the structural deficit for 2020, as estimated by the Government, would be identical to the one in 2019 (2.2 points of GDP) and would deviate significantly from the programming law. The structural deficit could moreover turn out to be higher than forecast in this third PLFR. Indeed, some of the expenditure related to the health crisis, considered as temporary by the Government, could be extended beyond 2020. Besides, there is a risk that the estimation of potential GDP could be revised downwards due to possible losses of human capital caused by the rise in unemployment and the consequences of the foreseeable increase in business bankruptcies and the decline in investment on productive capacity, as well as the impact on productivity of the lasting implementation of health protection measures.

The High Council notes that the forecast of the government debt-to-GDP ratio is revised upwards by more than 5 points compared to the previous PLFR and by 22 points compared to the initial finance act. This ratio would thus exceed 120 points of GDP at the end of 2020. This massive increase, which comes on top of an almost uninterrupted increase over the past ten years, weakens the medium-term sustainability of France's public finances and calls for careful vigilance.