PUBLIC FINANCES AND ACCOUNTS
THE SITUATION
AND THE OUTLOOK
OF THE FRENCH PUBLIC FINANCE
Synthesis
June 2020
This summary is intended to facilitate the reading and use of the
Cour des comptes
report.
Only the report is binding on the
Cour des comptes.
The joint reply of the Minister for the Economy and Finance and the Minister for Action and Public Accounts follows
the French report.
Summary of the report on the government budgetary situation and prospects
Summary
Introduction
...............................................................................................................
5
The situation in 2019: an incomplete repair of public finances
...............................
7
2020: a shock of unprecedented nature and magnitude for public finances
.........
11
Prospects beyond 2020: the challenge of debt sustainability
................................
15
Conclusion
................................................................................................................
19
Introduction
This report on the French public finance situation and outlook is drawn up, as it is every year, pursuant to the
third paragraph of Article 58 of the Organic Law on Budget Acts (LOLF).
Submitted jointly with the Government's report on the evolution of the national economy and the orientation
of public finances, it is intended to feed the debate that Parliament holds every year on the orientations of
public finances (article 48 of the LOLF). It takes on particular prominence this year in the context of the global
economic crisis caused by the viral pandemic.
In this report, the Court first examines the situation of public finances on the eve of the health crisis. It notes
that the repair of public finances was incomplete in France, 10 years after the financial crisis of 2008-2009,
particularly in comparison with other European countries.
The year 2020 is stricken by the epidemic that has affected all the countries of the world and France in
particular. The Court emphasises the considerable consequences of this crisis for public finances. On the basis
of the information available as of 25 June 2020, it assesses the risks surrounding the achievement of the
revenue, expenditure and balance forecasts presented by the Government in the context of the Third
Amending Budget Bill.
Finally, the Court sheds light on the issues related to the sustainability of public debt. It examines, on the
basis of different scenarios emerging from the crisis, the trends that public finances could follow over the
next decade. It analyses the conditions to monitor the debt trajectory. It lays out the principles for a fiscal
turnaround in the broader European context.
1
The situation in 2019:
an incomplete repair of public finances
The viral epidemic that hit the world in 2020, and
France in particular, has major consequences for
public finances.
First and foremost a health crisis,
it led to severe restrictions on economic activity
for several weeks, with the economy gradually
recovering since then. This is expected to result in
a massive loss of public revenue which, added to
the cost of the support measures adopted to avert
an even more serious crisis, would bring the public
deficit to an unprecedented double-digits level as
a share of GDP in 2020.
However, France has not faced this crisis with
restored public finances.
Over the past 40 years,
its public debt as a share of GDP has risen almost
continuously. The economic and financial shock of
the late 2000s, in a context very different from the
current crisis, had already led to a sharp
deterioration in public accounts, both in France
and
among
its
partners.
A
strengthening
subsequently started, based in particular on
increases in taxes and social security contributions
at the beginning of 2010, but this effort ran out of
steam over the decade. While the structural deficit
remained high, tax cuts followed the increases,
while the pace of expenditure growth did not
change accordingly, despite an environment of
low interest rates leading to a reduction in the
interest burden.
The public finance outturn in 2019 reflects this
unfinished repair.
The State deficit stood at 3
percentage points of GDP, including a one-off
effect of 0.9 percentage point related to the
addition in 2019 of both the tax credit for
competitiveness and employment (CICE) and the
social contribution reductions that replaced it. The
structural deficit was not reduced: at 2.2 points of
GDP, as in 2018, it remained far from the medium-
term objective set at 0.4 points by the 2018-2022
public finance programming law. Public debt
remained stable at 98.1 points of GDP.
The situation in 2019: an incomplete repair of public finances
The general government balance (in GDP points)
Source: Cour des comptes based on INSEE data.
The measures to reduce compulsory levies in 2019
amounted to nearly €10 billion, i.e. 0.4 points of
GDP, excluding the effect of the transformation of
the CICE. They reflected the cuts envisaged in the
initial budget bill, as well as decisions, taken
following the social movements at the end of
2018, to further support household purchasing
power and not to increase energy taxation.
Factors influencing the development of taxes and social security contributions in 2019 (in € billion)
Source: Ministry of the Economy and Finance, Cour des comptes
At the same time, public spending accelerated in
2019: although its growth remained slightly below
potential growth, this relative effort to control it
was insufficient to finance tax cuts and to improve
public accounts.
The situation in 2019: an incomplete repair of public finances
Change in public expenditure excluding tax credits at constant scope (%)
% change
Average
2011-
2016
2017
2018
2019
Government spending excluding tax credits
1,7 %
2,5 %
0,7 %
2,3 %
Controllable public expenditure by public authorities
1,9 %
2,0 %
1,4 %
2,8 %
Controllable Public expenditure in volume (GDP prices)
1,0 %
1,5 %
0,4 %
1,5 %
Source: Cour des comptes based on INSEE data. At current scope, public expenditure excluding tax credits increased by 2.7% in 2019
It was therefore with insufficient room for action
that France entered the health crisis
. It did not
take advantage of the fairly favourable economic
conditions of recent years to eliminate the
structural part of its public deficit, nor has it taken
advantage of it to significantly reduce the weight
of public spending, which, at more than 55 points
of GDP in 2019, remained 8 points above the euro
area average. It ended the previous decade with a
debt level of almost 100 GDP points, compared
with less than 65 GDP points in 2007. Germany's
public debt, which in 2007 was at a similar level as
a share of GDP to that of France, fell below 60
points
in
2019,
underscoring
a
worrying
divergence.
Public debt in France and other euro area countries
(in GDP points)
Source: Cour des comptes on the basis of Eurostat data
2
2020: a shock of unprecedented
nature and magnitude for public finances
In 2020, the shock to public finances is massive
.
According to the government's latest forecast, the
public deficit would amount to €250 billion, or 11.4
points of GDP. The scale of the support provided by
public finances to maintain revenues is unprecedented.
The public debt would increase by nearly €270 billion in
2020 and would exceed 120 points of GDP. In amounts,
it would represent the equivalent of almost €40,000 per
French citizen.
In the initial budget law, the public deficit for 2020 was
forecast at just over €50 billion; the deterioration
expected today is therefore almost €200 bill
ion. This
explosion in the deficit is mainly due to the effect on
public revenue of the decline in GDP (-11% in volume
over the year according to the government's latest
assumption): the loss of public revenue would amount
to almost
€135 billion,
representing
about two-thirds
of the increase in the deficit. A small part of the
increase in public spending is also attributable to a
mechanical effect of the recession, particularly in the
area of unemployment benefits.
The increase in deficit is also the result of the support
measures that the Government presented in three
amending budget laws between March and June. Their
direct impact on the public deficit is €57.5 billion, or 2.6
points of GDP. In addition to these measures, the State
granted its guarantee to a massive program of loans to
businesses (up to €300 billion) and undert
ook
operations
to
rescue
companies
through
equity
investments or guarantees. Overall, these actions are
globally comparable in scale and nature to those
adopted by neighboring countries, although the limited
available evidence makes comparisons difficult and
there may be significant discrepancies between the
announced measures and their implementation.
2020: a shock of unprecedented nature
and magnitude for public finances
Revision of the public balance forecast between the initial Budget Act and the budget bill for 2020 and the third
draft amending budget bill
Source : Ministry of the Economy and Finance, Cour des comptes
According to the forecast associated with the third
amending budget bill for 2020, taxes and social security
contributions would fall by more than €100bn in 2020,
mainly as a result of the contraction of GDP. This forecast
assumes that the fall in taxes and social security
contributions would be broadly proportional to the fall in
GDP, although some revenues such as corporate income
tax would fall much more, while others such as the general
social contribution would not fall as much. Moreover,
setting aside the technical backlash effect of the
transformation of the CICE in 2019, the new measures,
such as the reduction in income tax, would help to reduce
taxes by more than €12 billion.
Factors influencing the evolution of the compulsory
levies (OP) in 2020 according to forecasting the
third
amending budget bill
(in € billion)
Source: Ministry of the Economy and Finance, Cour des comptes
2020: a shock of unprecedented nature
and magnitude for public finances
Public spending (excluding tax credits) would grow by
almost 6.5% in value in 2020. Excluding support measures,
growth would be more moderate at just over 2%. The ratio
of
public
expenditure
to
GDP
would
reach
an
unprecedented level (63.4%), also due to the effect of the
decline in GDP in the denominator.
Evolution of public expenditure (excluding tax credits) in
2020 according to the third amending budget bill for 2020
forecast (in %)
Source:
Ministry of the Economy and Finance, Cour des comptes
In view of the high uncertainty about health developments
and the strength of the recovery in the second half of the
year,
the public finance forecast for 2020 is broadly
balanced.
With regard to GDP, unless the outbreak of the epidemic
leads to further activity and travel restrictions, the
envisaged 11% decline in GDP is a plausible, even cautious,
assumption. The assumptions adopted for the evolution of
revenue are also reasonable, as are those, reassessed in
the third amending budget bill, relating to the cost of
support measures. However, the Government has not
included
in
its
latest
forecast
some
subsequent
announcements such as the plan for small businesses, nor
has it included any potential effect on the deficit (in
national accounts terms) of certain measures that may
have an impact on it, such as the deferral of social security
contributions or company bailouts.
Overall, to cope with the emergency, the State played the
role of
“
last resort insurer
" of the economic activity and
incomes.
It did so in France, as it did in neighboring
countries, since the normal rules for the conduct of public
finances within the euro area were suspended. Thus, the
income of private agents was for the most part preserved.
The loss of collective wealth caused by the recession was
therefore mainly offset by a sharp increase in public debt.
While
for
some,
the
crisis
already
had
dramatic
consequences, most of its economic cost has not yet been
"paid": it has been transferred to public debt.
3
Prospects beyond 2020:
the challenge of debt sustainability
The sustainability of public debt is a central issue.
In 2021
and beyond, we can expect a clear rebound in the
economy and hence a mechanical reduction of the public
deficit to lower levels. At this stage, the Government is
counting on a full rebound in the long term (the so-called
"catch-up" scenario): potential GDP would not have been
affected by the crisis, in particular because of the support
measures adopted.
However, this assumption appears optimistic. It is more
likely, despite the health origin rather than the economic
or financial origin of the crisis, that it will leave lasting scars
on the economic capacity, as illustrated by other scenarios
(so-called "limited loss" and "persistent weakness"
scenarios).
GDP volume trajectory in three scenarios (in €bn)
Source: Cour des comptes
In the likely event that the health crisis would leave lasting
traces on productive potential, the spontaneous
rebalancing of public accounts would only be very partial.
The deficit is therefore likely to be very high in the long
term, well above the pre-crisis level, even once the
economy has returned to normal functioning.
Prospects beyond 2020:
the challenge of debt sustainability
Development of the public deficit in the three scenarios
(in GDP points)
Source: Cour des comptes
Without
a
significant
adjustment
effort,
the
debt
trajectory would not be under control. Even in the most
favourable scenario, it would still be higher in 2030 than
its pre-crisis level. In the other scenarios, it would remain
at a very high level and would tend to rise again.
Evolution of public debt in the three scenarios
(in GDP points)
Source: Cour des comptes
However, France cannot allow its debt to run out without
exposing itself to major difficulties in the medium and
long term.
In the immediate term, the risks of a financial
crisis are low because interest rates are at a
historically low level. In the long term however, they could
end up rising, either in the euro area as a whole or in the
most indebted countries of the euro area. If in the
meantime France has not reduced its public debt to GDP
ratio, the country would be in a very difficult situation.
Prospects beyond 2020:
the challenge of debt sustainability
Reducing debt is also necessary to restore room for
maneuver
and
to
reduce
the
divergence
in
the
trajectories of euro area countries, particularly between
France and Germany
. Once overcome the exceptional
conditions linked to the pandemic, this will be the
challenge of renewing the Stability and Growth Pact.
In the immediate term, the Government plans to
continue to support the economy as part of a "recovery"
initiative.
However, while complementary measures can
support employment and accompany transitions, these
actions should henceforth be carried out in a targeted
manner and not be financed by debt. Such complementary
measures, like those already taken, must in any case be
temporary and have clear sunset clauses. In addition,
some recovery actions could be financed by a European
initiative, as discussed recently, rather than through
additional recourse to national debt.
Beyond these short-term measures, France will have to
rebuild a public finance strategy.
In-depth action is
needed to anchor the sustainability of public debt and to
enhance the quality of public policies. It is possible, as the
experiences of history both in France and abroad show, to
significantly reduce the debt burden without putting a
lasting strain on growth. On the other hand, however, we
should not expect everything from growth. As soon as
economic conditions permit, and in line with European
commitments, an effort must be made to achieve a
structural strengthening of public finances. It must not be
too abrupt not to break the recovery, but it must be
pursued steadily in order to achieve tangible results. The
next public finance programming law, which should be
presented at the latest at the same time as the next
Stability programme, will provide an opportunity to set
this direction and to include it in a reinforcement of the
regulatory framework for the governance of public
finances.
In order to carry out such a consolidation effort, which is
essential to control the trajectory of public finances but
also desirable in order to create the conditions for
sustainable growth,
an in-depth review of our public
policies is necessary
. This is all the more necessary as
expectations of support through public spending are
growing. However, achieving a significant recovery in
expenditure implies that expenditure growth will be
significantly lower than in recent years. Therefore, if we
wish to make effective investments for the community, for
example to support the ecological transition, we will have
to
agree
to
re-examine
the
modalities
of
public
intervention in all areas, based on much broader
expenditure reviews than what has been done in the past
in France.
The effort needed to control expenditure will also
depend on the choices adopted for compulsory levies
. If
further
reductions
in
taxes
and
social
security
contributions are to be considered, after those already
made in 2019 and 2020, they should be accompanied by
increases in other taxes and social security contributions
or by the elimination of tax loopholes or
“
niches
”
, or they
should be matched by an even greater effort to control
spending.
Conclusion
France approached the health crisis with an incomplete repair of public finances. Its deficit was reduced during the decade
2010 but remained at a significant level. Its public debt, which had already risen sharply during the economic and financial
crisis of the late 2000s, was never reduced.
In 2020, like the other countries hit hard by the health crisis, France accepted the massive loss of public revenue caused by
the economic recession and adopted a considerable support plan to fight the epidemic, to sustain incomes and preserve the
productive apparatus as much as possible. The result is an exceptional public deficit, in double digits as a share of GDP, and a
further increase in public debt, which is estimated to exceed 120 GDP points, a level not seen in France since the two World
Wars.
With low interest rates as they are today, this situation is bearable, which has allowed a strong budgetary response to the
health crisis. But the additional debt caused by the crisis, like the debt resulting from past deficits, has not disappeared, and
it cannot be erased. France will have to define a path to return to balanced public finances and significantly reduce its public
debt in relation to GDP to make it sustainable, taking advantage of the period of favourable financial conditions. The
experience of other countries, and of France in a more distant past, shows that this is possible and compatible with a dynamic
of progress.