Opinion on the general government structural balance presented in the budget settlement bill for 2021

The Government referred to the High Council of Public Finance on May 13, 2022, in accordance with Article 23 of Organic Law No. 2012-1403 of 17 December, 2012 on the programming and governance  of public finances, to assess whether the multi-year structural balance objectives were met in 2021.

On June 20, 2022, the Government sent an amending referral to the High Council, in order to take into account the revisions made by Insee on May 31, 2022 to the national accounts for the years 2020 and 2021.

The High Council, after deliberating at its June 24, 2022 meeting, adopted the following opinion.

Opinion's summary

The evaluation of the structural deficit (4.4 percent of potential GDP) submitted by the Government for 2021 is 3.1 percentage points higher than forecasted in the Programming Law (LPFP) of January 22, 2018 (1.2 percent of potential GDP). This difference is much higher than 0.5 percent and must therefore be considered significant, in accordance with Article 23 of the Organic Law n° 2012-1403 of December 17, 2012.

The High Council notes that the public health crisis continued to significantly impact the situation of public finances in 2021 and therefore, it considers that the exceptional circumstances mentioned in Article 3 of the Treaty on Stability, Coordination and Governance (TSCG) were met in 2021, just like in 2020. Consequently, the High Council considers that although the gap between the structural balance and that of the LPFP is significant, this must not lead to the triggering of the correction mechanism for the 2021 exercise.

The High Council considers that the management of public finances requires that the exceptional circumstances clause must not be applied permanently. The High Council therefore invites the Government to promptly specify the criteria for lifting or maintaining this clause.

As stated in its past opinions, the High Council reiterates that the structural balance estimate on which it must give an opinion today is very hazy and does not reflect the actual situation of public finances.

First of all, the impact of several temporary factors arising from the health crisis in 2020, combined with the Government's decision to exclude the entirety of the emergency support measures from the structural balance estimate for 2020 alone, lead to an artificial improvement in the structural balance for 2020 (from -2.5 percent of potential GDP to  1.1 percent) and, on the contrary, to an accentuated deterioration in 2021 (from -1.1 percent of potential GDP to -4.4 percent). This is notably because this time, the emergency support measures directly linked to the pandemic have been considered as affecting the structural balance. All these factors alter the significance of the structural balance over these two years.

Secondly, the pandemic has made the potential GDP estimate provided in the 22 January 2018 LPFP obsolete, as it predates the pandemic, even though that law remains the reference upon which the High Council must base this opinion, in accordance with the December 2012 organic law. In this respect, the High Council notes that considering the updated assessment of potential GDP presented in the Economic, Social and Financial Report for 2022 would lead to a deterioration of the structural balance by an additional percent of GDP in 2021 (-5.4 percent of potential GDP instead of -4.4 percent). This confirms the importance of the discussions underway at a European level on European fiscal rules.

Public debt sustainability requires a clear reduction of the structural deficit in the coming years and, especially, to take action on public spending which, in terms of GDP, remained significantly higher than its pre-crisis level in 2021.