Lhe downgrade of France’s rating by Standard & Poor’s on May 31, just like the parliamentary commission of inquiry launched on May 7 on the origin of the deterioration of public accounts, placed the public debt, just before the dissolution of the Assembly, at the center of the political debate: the difficulty in getting the budget voted on by a paralyzed Parliament undoubtedly played a role in the presidential decision. In the new assembly, there will need to be a deep political debate on the direction of public finances, because this is the condition for social acceptance of future efforts.
Indeed, the risk of high public debt is political paralysis, as in Italy or Japan. Interest charges on Italian debt are such that most of the revenue increases go to interest payments, leaving little room for other policies against global warming or public investment. The absence of investment and growth is leading to an increase in Italian rates on public debt, due to distrust among savers, which further increases the cost of debt. This increase in rates is starting to be observed in France. We must create budgetary room for maneuver in France now to enable the necessary policies tomorrow. Thus, the politicization of debt must go beyond posturing, as the changes will have to be significant.
To begin with, why has France’s public debt increased so much? From 65% in 2007, it reaches 111% of gross domestic product (GDP) in 2023, an increase of 56 points of GDP. Analysis of this progression of French debt by three different methods shows that half of the increase since 2007 comes from the reaction to economic crises. The other half comes from structural imbalances between government spending and revenue.
Recover public money
Crisis after crisis, recovery plans, tax cuts and financial support provided by the State have helped to reduce the negative effects of crises. It is necessary, but we would have to know how to recover public money once the crisis has passed, which governments, neither left nor right, have been able to do. Economic crises are staircases for public debt, without us seeing the debt fall once the crisis has passed.
A concrete example shows this specifically French difficulty. In July 2020, the German government implemented a transitional reduction in VAT for six months. The advantage of this measure is its transitional nature. Like a period of national sales, it induces an increase in consumption which supports the economy.
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