French Auditors Warn about Deficit
France’s debt-to-GDP ratio above permissible European Union level
France’s national auditor has raised concerns about the nation’s deteriorating fiscal situation as Europe’s second largest economy struggles to curb spending and manage the economic impact of snap elections last month.
The audit report from the Cour des Comptes, the supreme national audit institution, showed that 2023 was a “very bad year” for the French economy. The national budget deficit increased to 5.5% of gross domestic product (GDP) last year from 4.8% in 2022, making it the second highest debt to GDP ratio in the European Union (EU) after Italy.
“Due to delays in making real structural reforms, the cost of public debt, which has been exacerbated by recurring deficits and the weight of these deficits, has become more and more expensive,” Cour des Comptes said in its report. This "hinders the ability to make investments and leaves the country dangerously exposed in case of a new macroeconomic shock," it added.
French President Emmanuel Macron, whose party has presided over an additional €900 billion increase to the national debt since taking office in 2017, has vowed to reduce deficit to under 3% by 2027. The Cour des Comptes think is an “unrealistic” target.
“Any deviation from the growth, expenditure or revenue forecasts would be enough to derail the trajectory and miss the deficit and debt targets for 2027,” Cour des Comptes said. The French government has failed to take into account an additional €60 billion per year it will need to meet its environmental policy goals by 2030.
Debt Rating Cut
Standard & Poor's cut in June the country's long-term sovereign debt rating to "AA-" from "AA," citing expectations that higher-than-expected deficits would push up debt. This has impacted the cost of insuring against default.
Still, the cost of French debt, which has been rising since January, seemingly peaked in July. Following the victory of the left-wing coalition, the New Popular Front, the French 10-year treasury continued lower. It closed the month at 3%, far below the 3.34% peak.
France’s public debt, which rose from €125.8 billion in 2022 to €154 billion in 2023, reaching a total of 110.6%, is projected to increase to 112.4% in 2024 and 113.8% by 2025.
France Debt to GDP
France’s deficit places it well outside the acceptable levels permitted under EU regulations, which allow for a national expenditure no higher than 3% of GDP while mandating that public deficits cannot exceed 60%.
‘Excessive Deficit’
Brussels announced disciplinary proceedings against France, and six other EU countries, for their deficits. The European Commission could relaunch a controversial fiscal intervention that’s been suspended since the Covid-19 pandemic.
The commission recommended that they start a so-called “excessive deficit procedure,” the first step in a long process before any member state can be hemmed in and moved to take corrective action.
“Deficit criteria is not fulfilled in seven of our member states," said EU Commission Vice President Valdis Dombrovskis, also pointing the finger at Belgium, Italy, Hungary, Malta, Slovakia and Poland.
“We look forward to receiving national fiscal structural plans from Member States that bring down debt and deficit and reflect today’s recommendations.”
Fueling the Flames
For France, this may be difficult given the uncertain political landscape after the far-left alliance won the second round of snap elections on July 7.
The far-left coalition won 188 seats, Macron’s Renaissance centrist alliance 161 seats, and Marine Le Pen’s National Rally in third place. With the far-left falling short of the a majority in parliament, lawmakers may struggle to build consensus.
Policies being pushed by far-left leader Jean-Luc Mélenchon could expand the budget deficit. Emboldened by his party’s success, Mélenchon has vowed to implement “nothing but the platform, and all the platform,” of the coalition.
If Mélenchon and his left-wing coalition are successful in implementing their platform, the economic ramifications would be catastrophic for the country’s economy and financial markets, according to analysts.
The leftist alliance has “proposed a program that includes big increases in public spending, rolling back the retirement age and other policies that are at odds with the EU — and are estimated to cost an additional €179 billion according to the Institut Montaigne,” Tina Fordham, the founder of Fordham Global Insight, told CNBC. “Market-friendly they are not.”
President of the Cour des Comptes Pierre Moscovici has argued that the deficit is an apolitical issue, saying that “Reducing our debt is a pressing obligation… It’s not a matter of left or right: it’s in the general interest.”.
Wealth Tax
Mélenchon and his coalition have called for a 90% wealth tax that it argues would generate around €100 million a year in revenue. Previous efforts to generate revenue through wealth taxation have failed.
The last time France implemented a wealth tax in 1989 the most revenue ever realized in one year came to around 0.2% of the nation’s total GDP, the Wall Street Journal reported, citing Cristina Enache from the Tax Foundation.
French economist Éric Pichet said that capital flight from France due to the wealth tax reached over €200 billion between 1989 to 2007 alone.
It remains uncertain how much of this platform the NFP will be able to realistically pass without the support of the French far-right party Rassemblement National, according to Politico. Certain issues such as the repeal of retirement reforms, funding for Ukraine and further investment in renewable projects such as hydraulic energy have received backing from other parties.
Mélenchon Argues
Although some analysts have dismissed the idea of Mélenchon or his contemporaries ever gaining a significant leadership role within the new government, this remains far from certain.
Mélenchon has argued that a new prime minister should hail from the largest coalition in government as is tradition. Macron has been resistant to this, instead exploring candidates with a more moderate profile. As negotiations over the structure of France’s new government drag on, some left-wing NFP leaders see an opportunity to press their advantage.
Macron has elected to kick the proverbial ‘can down the road,’ announcing he will not select a new Prime Minister until after the completion of the Paris 2024 Olympics on August 11.
This will offer little reprieve as government disarray and the risk of further economic fallout helmed by the leftist factions of the NFP will persist well after the games’ closing ceremony.