The Government referred the macroeconomic framework of the draft Stability Programme to the High Council of Public Finance on April 9, 2024.
The High Council has been referred in three stages, from April 9th to 11th, 2024, on the forecasts associated with the Stability Programme. It regrets that the Government's submission was late and incomplete, making difficult to have a precise understanding of the choices made, especially considering that France's public finances are in a worrying situation.
In its opinion of September 2023 on the draft law of the Public Finance Programming Law (LPFP) 2023-2027, the High Council considered that the Government's growth scenario was optimistic and the trajectory of public finances unambitious compared to France's European commitments. It highlighted that the underlying structural savings were still to be precised.
It emphasized that a modest change in the debt trajectory was exposing France to a risk of increased divergence with other Eurozone countries. It recalled the need to reduce debt to protect against a rise in interest charges and to have sufficient fiscal space to address future economic or financial shocks, as well as to meet the high public investment needs, particularly for the ecological transition. The risk of divergence has significantly increased in light of the results of the 2023 exercise.
The Stability Programme presented by the Government significantly alters the trajectory of the Public Finance Programming Law (LPFP), enacted less than four months ago.
The Government has revised downward its growth trajectory for the period 2023-2025 by 0.8 percentage points, as recent trends have called into question the previous underlying assumptions about household savings and investment behaviours as well as corporate investment: after a growth of 0.9% in 2023 (compared to the 1% forecast in the LPFP), it now predicts growth of 1.0% in 2024 (down from 1.4%) and 1.4% in 2025 (down from 1.7%).
The Government also revised, but only marginally, its assessment of potential GDP, resulting in a negative output gap that persists until 2027. Maintaining a negative output gap over a long period (8 years since 2020) is a configuration never observed in ex post output gap assessments. This strengthen the High Council's diagnosis that the potential GDP trajectory used in the Government's forecast is overestimated. Therefore, there is a significant risk that the Government's assessment of potential GDP will be revised downward later on, leading to an upward revision of the structural part of the deficit.
The new public finance trajectory presented in this Stability Programme is significantly more deteriorated than in the public finance programming Law (LPFP). Starting in 2023, public deficit (5.5 percentage points of GDP) and public debt (110.6 percentage points of GDP) are much higher than projected in the LPFP (by 0.6 and 0.9 percentage points of GDP respectively). It is also the case in 2024, when the deficit (5.1 percentage points of
GDP) is expected to increase by 0.7 percentage points compared to the LPFP, despite taking into account saving measures in the forecast. The target for the public deficit in 2027 has also been raised (2.9 percentage points of GDP instead of 2.7 points), even though the Government maintains the goal of returning below 3 percentage points of GDP by that time. Given the deterioration in public finance forecasts in 2023 and 2024, this trajectory is much more demanding than the LPFP.
This trajectory leads to an increase in the debt-to-GDP ratio compared to 2023. It would reach 112 percentage points of GDP in 2027, which is 4 points higher than projected in the LPFP. France is thus delaying the reduction of its debt-to-GDP ratio and would remain for a sustained period among the three most indebted countries in the eurozone.
In light of the deterioration of the public balance recorded in 2023 compared to the LPFP forecast and lower growth assumptions, bringing the public deficit back below 3 percentage points of GDP in 2027 would require a massive structural adjustment between 2023 and 2027 (2.2 percentage points of GDP over four years), which, according to the information provided in the Government's request, would mainly rely on expenditure savings.
The High Council considers that this forecast lacks of credibility: while such an expenditure effort has never been achieved in the past, its documentation remains incomplete at this stage, and its implementation requires the establishment of rigorous governance involving all stakeholders (the Central Government, local authorities, and social security), which is not currently in place.
The Government forecast also lacks consistency: the implementation of the planned structural adjustment will necessarily weigh on economic activity, at least in the short term, so that the Government's high growth forecasts for the period covered by the LPFP appear inconsistent with the magnitude of this adjustment.
Bringing the scenario into coherence would thus, with unchanged macroeconomic forecasts, require a more limited deficit reduction effort, or, with an unchanged deficit reduction objective, significantly lower growth forecasts and even greater expenditure efforts than those, albeit unprecedented, planned by the Stability Programme trajectory.
The High Council reiterates that the necessary deficit reduction primarily requires a coherent and credible strategy to reduce the weight of public expenditure in GDP, and a reassessment of the planned reductions in compulsory levies.