1

The overall situation

of public finances

(at the end of January 2022)

2022 Annual Public Report

2

_____________________________ PRESENTATION _____________________________

Opening the Court

’

s annual public report focusing on the health crisis and its

consequences for public action, this chapter analyses the position of public finances after the

major shock of 2020, which resulted in an economic recession of 8% and a public deficit of 9.1

points of GDP.

2021 is the year of a recovery in economic activity, with GDP growth expected at 6¼%

in the forecast associated with the last amending budget (Act) for the year. It could even reach

7% according to the latest release from Insee. After returning to its pre-crisis level in the second

half of 2021, activity should continue to recover in the course of 2022 and, according to

government forecasts, growth should then reach 4%.

According to the second Amending Budget (Act) for 2021 and the initial budget act for

2022, public deficit should remain very high in 2021 (8.2 points of GDP) and in 2022 (5 points

of GDP), despite the sharp upturn. The deficit corrected for the impact of the economic position

(structural deficit) should also amount to 5 points of GDP in 2022, i.e. double its pre-crisis level.

As a consequence of these deficit levels, public debt would represent 113.5 points of GDP in

2022 and would then overshoot its 2019 level by 16 points of GDP. Nevertheless, according

to statements by the Government in mid-January, the public deficit for 2021 could settle at a

level close to 7 points of GDP, which is significantly lower than expected.

Nearly two years after the start of the crisis, France will be one of the countries in the

euro area whose public finance position is the most deteriorated. This position will call for the

definition of a demanding medium-term trajectory for the recovery of public finances to ensure

a drop in the debt-to-GDP ratio.

After a presentation of the situation of public finances in 2021 and 2022, as well as the

main contingencies affecting it (I), the Court analyses the issues related to the medium-term

trajectory of public finances (II).

The Court

’

s observations are based on the information available at the end of January

2022.

3

I - A public deficit which should decrease in 2021 and 2022 but

would remain very high despite the marked recovery in activity

A - A dynamic economic activity that should exceed the pre-crisis level

After falling by 8% in 2020, GDP recovered by 6¼% in 2021 according to Amending

Budget (Act) no. 2 (LFR 2) for 2021. According to the first release published by Insee on 28

January 2022, growth in 2021 should be higher, at 7%.

Activity was maintained at the start of 2021 at a level nearly 5% below its pre-crisis level.

The health restriction measures of spring 2021 did not lead to a noticeable deterioration in

activity and it gradually recovered from May. From the summer of 2021, activity has almost

caught up with its level of the fourth quarter of 2019.

Graph n° 1: monthly activity loss in 2020 and 2021 (economic activity gap compared to

the average for the fourth quarter of 2019, in %)

Source: Insee

Note: in March 2021, economic activity was down 5% compared to the level of the fourth quarter of 2019. The grey areas

correspond to the periods of lockdown.

4

In 2022, GDP is expected to grow by 4% according to the initial budget act (LFI) for 2022.

Consequently, with the Government

’

s most recent potential growth assumption, GDP in 2022

would reach a level slightly higher than its potential level.

Insee forecasts published in its economic report for December 2021

1

showed higher

growth in 2021 (6.7%

2

compared to 6¼% in the last Supplementary Budget (Act) of the year)

but lower in 2022 (around 3½% by extending the Insee forecast

3

compared to 4% in the budget

bill (PLF) for 2022). In total, cumulatively over the two years, Insee

’

s forecast is close to that

of the Government. This forecast, like that of the Government, does not take into account the

possible effects of a worsening of the health crisis which would lead to new measures

restricting activities.

Since the presentation of the PLF 2022, at the end of September, the revision of the

growth forecast for 2021, from 6% in the PLF to 6¼% in the last Supplementary Budget (Act)

of the year, combined with the opening of appropriations for new measures in both 2021 and

2022 (major investment plan, new active measure for young people, inflation compensation,

energy cheque,

“

France 2030

”

plan), have led the Government to significantly revise its

forecast of revenue, expenditure and deficit for these two years.

B - Strong recovery in revenue despite major tax cuts

In 2021 and 2022, government revenues should increase significantly, supported by the

upturn. According to the LFR 2 for 2021 and the LFI for 2022, compulsory levies would thus

increase by 5.1% and 4.6% respectively, but less than economic activity (+6.7% then +5.5%)

due to significant tax cuts. The rate of compulsory levies should therefore fall by just over one

point in these two years (falling from 44.5% in 2020 to 43.8% in 2021 then 43.4% of GDP in

2022). Without these tax cuts, the compulsory levy rate would have remained constant, at a

level close to that of 2020. The information available in mid-January, still partial, relating to the

end of management, however indicates a much more marked dynamism in revenue in 2021.

1

“Recovery under constraints”, economic report,

Insee, December 2021.

2

According to the first computation published by Insee on 28 January 2022, growth in 2021 would be higher, at 7%.

3

The Insee forecast ends in the second quarter of 2022. Extending with quarterly growth rates of 0.5% for the third

and fourth quarters of 2022, a figure corresponding to the average growth forecast by Insee for the first half of 2022,

growth would be 3.4% in 2022.

5

Graph n° 2: change in the rate of compulsory levies over the period from 2000 to 2022

(in % of GDP)

Source: Insee, PLFR 2 for 2021 and PLF 2022 revised for 2022

1 - Spontaneous growth in compulsory levies close to that of GDP

Compulsory levies should increase spontaneously

–

i.e. excluding upside and downside

measures

–

by 6.6% in 2021 then 5.5% in 2022, i.e. values very close to those of nominal GDP

growth. After a year 2020 where compulsory levies had resisted the crisis linked to the covid 19

epidemic better than growth

4

, the risk of seeing compulsory levies grow spontaneously less

quickly than economic activity in 2021 and 2022 would

’

nt materialise in the forecast attached

to the revised PLF 2022.

In 2021, the dynamism of revenues at constant legislation should reflect the particularly

strong evolution of a few major taxes, in particular transfer duties (DMTO; +21.9%), VAT

(+11.8%), domestic consumption tax on energy products (TICPE; +8.3%) and corporation tax

(IS; +10.3%), while other levies less sensitive to the economic position are likely to grow less

rapidly than GDP.

In 2022, income tax (+8.5%) and VAT (+6.3%) should spontaneously increase faster

than GDP.

The information made public in mid-January showing a significantly reduced public deficit

compared to the initial forecast suggests much more dynamic public revenues than expected

at the time of the LFR 2 of 2021. This additional revenue could concern VAT, sustained by

stronger than expected growth, corporation tax, the yield of which is not always easy to predict,

but also tax and social security levies based on the wage bill, the development of which has

been clearly underestimated by the Government. Such discrepancies between the execution

4

In 2020, compulsory levies fell by 4.6% while GDP fell by 5.7%.

6

known in mid-January and the forecasts raise questions about the quality of the forecast made

at the time of the PLFR 2 presented in early November.

2 - The continuation of significant tax cuts

The policy of lowering compulsory levies initiated in 2018 continued in 2021 and 2022.

After having limited the increase in 2021 (-

€15.5 bn), tax reductions should once again have a

significant impact on public revenue in 2022 (-

€10.1 bn out of a total amo

unt of compulsory

levies of €1

125 bn).

In 2021, the reduction in taxes on production decided as part of the stimulus plan (-

€10.6

bn) was added to those decided before the crisis, concerning corporation tax (-

€3.7 bn) and

housing tax (-

€2.6 bn).

In 2022, the main tax cut concerns the domestic tax on final electricity consumption

(TICFE) to deal with the increase in tariffs (

“

tariff shield

”

), adopted by amendment to the initial

budget bill for 2022 for an estimated cost of €5.9 bn. Under the terms of the

LFI for 2022, this

reduction is temporary: it will apply from 1 February 2022 to 31 January 2023.

As the impact on public finances of this measure was subject to strong uncertainty and

to deal with the possibility that its cost would exceed the amount of t

he TICFE (€7.3 bn in

2020), the Government voted an amendment allowing it to set, exceptionally during 2022, a

level of regulated tariffs lower than that set out in the energy code.

According to the latest available forecast, limiting the increase in electricity prices to 4%

would cost the central government budget €8 bn through the

near disappearance of the TICFE,

compared to €5.9 bn provisio

ned at the time of the PLF 2022, to which would be added

approximately €8 bn charged to EDF

which the central government has asked to increase by

20% the production it sells to its competitors at the regulated tariff, i.e. at a level much lower

than the market prices.

This tax cut is in addition to others already underway. Thus, the second phase of the

reduction in housing tax on the main residences of households in the last two revenue deciles

should reduce public revenue by €2.8 bn, while the final stage of the reduction in the

corporation tax rate will have a negative impact of €2.9 bn on revenue.

Table n°1: new measures in compulsory levies in 2021 and 2022 (in

€bn)

New measures

2021

2022

Reduction in production taxes (TFPB, CFE and CVAE) as part

of the stimulus plan

-10.6

0

Corporation tax return effect of the reduction in production taxes

1.5

1.3

Lower corporation tax rate

- 3.7

- 2.9

Reduction in the domestic tax on final electricity consumption

(TICFE)

- 5.9

Continuation of the abolition of housing tax on main residences

- 2.6

- 2.8

Other

- 0.1

+ 0.2

Total

- 15.5

- 10.1

Source: PLF 2022 revised

7

C - A high level of public expenditure, sustained growth excluding

temporary measures

1 - Public expenditure above its pre-crisis level

Public expenditure should represent 59.8% of GDP in 2021 and 55.7% in 2022 according

to the LFR 2 for 2021 and the revised PLF for 2022. It would thus be nearly two points of GDP,

or around €50 bn, higher than its 2019 level (53.8%).

Graph n° 3: public expenditure in GDP (excluding tax credits) as a share pf GDP

Source: Insee, ministry of the economy, finance and economic Recovery

These high levels compared to 2019 are explained, especially in 2021 and to a lesser

degree in 2022, by the support and recovery measures taken to deal with the health crisis.

After reaching nearly €70 bn in 2020, they increased again in

2021 to reach €90 bn. In 2022,

they should decrease significantly but would still amount to €30 bn, mainly under the stimulus

plan.

The level of residual support and stimulus measures in 2022 (1.1 points of GDP) would

thus only partly explain the increase of almost two points of GDP in public expenditure between

2019 and 2022.

8

Table n° 2:

main support and stimulus expenditure in the face of the health crisis (€bn

unless otherwise indicated)

2020

2021

2022**

Short-time working

26.5

9.3

0.0

Support fund

15.9

22.8

0.0

Health expenditure

14

15.9*

5.0

Social security contributions exemption

5.8

2.6

0

Extension of replacement income and postponement of

the entry into force of the unemployment insurance

reform

3.9

5.3

0.3

Stimulus plan***

1.8

28.2

20.1

Others****

2.8

6.1

3.5

Total

70.7

90.2

28.9

Total in points of GDP

3.1

3.6

1.1

Source:

ministry of the economy, finance and economic recovery.

* This figure corresponds to the forecast of the voted LFR 2. In particular, it includes €1.2 bn in crisis expenditure which

was added

during the parliamentary discussion. ** Expenditure from carryovers of appropriation could be done during the year *** Excluding

European funding for the stimulus plan. In the national accounts, they could total €16.5 bn in 2021 and €10.6 bn in 2022.

**** Including the effects on the cash flow of the Services and Payment Agency (ASP) and Public Health France (SPF), claims on

PGE (net of premiums) and other specific support measures (non-SPF masks, etc.).

2 - Expenditure excluding support and stimulus more dynamic than before the crisis

Excluding support and stimulus expenditure, public expenditure (excluding tax credits)

should increase, in volume, at a sustained pace in 2021 and 2022 (+2.2% and +1.1%)

according to the LFR 2 for 2021 and the revised PLF for 2022.

Table n° 3: growth in public expenditure excluding tax credits

2020

2021

2022

All expenditure

In value

6.8%

4.9%

- 1.7%

In volume

6.6%

3.4%

- 3.2%

Excluding support

and stimulus

In value

1.4%

3.6%

2.6%

In volume

1.2%

2.2%

1.1%

Source: ministry of the economy, finance and economic recovery

9

After having increased sharply in 2021

, total central government expenditure (€534.6 bn

in 2021) should fall by more than €30 bn, mainly due to the fall in support and stimulus

expenditure, while expenditure under the

“

Invest for France 2030

”

plan should be taken into

account for €3.5 bn

5

.

Non-crisis central government expenditure

6

should increase sharply, by nearly €11 bn in

2021 and €8 bn in 2022.

In 2021, this increase notably includes measures decided late and provided for by LFR

2, such as inflation compensation (+€3.6 bn) and compensation

by the central government for

loss of revenue, due to the crisis, of certain government agencies (€2.6 bn), including France

jcompétences (+

€

2 bn).

For 2022, a significant portion (more than €4 bn) of this increase comes from expenditure

covered by sectoral programming laws

7

. In addition, new expenditure will drive central

government expenditure: measures in favour of school education staff (€0.7 bn), disability

policy (€0.6 bn), access to housing (€0.6 bn), emergency

housing

(€0.5 bn).

The uncertainties surrounding the level of central government expenditure in 2022 are

linked in particular to the possibility that support mechanisms will be reactivated in response

to the fifth epidemic wave and to the risk posed by inflation remaining at a high level on interest

expenditure, in particular those resulting from inflation-indexed bonds.

The data made public by the Government in mid-January show central government

expenditure slightly lower than expected in 2021. The Court will have the opportunity to analyse

in detail the evolution of central government expenditure in its annual report on budget

execution made public at the same time as the Budget Settlement Act.

Expenditure by local autho

rities (around €280 bn in 2021

8

) should grow by 4.7% in 2021

and 2.7% in 2022. The dynamism of 2021 is mainly explained by the sharp increase in

investment in 2021 (+12.3%). This expansion more than offsets the decline in local investment

in 2020 (-5.5%), a year marked by the stoppage of construction sites due to the health crisis

and the municipal elections.

Expenditure excluding investment by local authorities should increase sharply in 2021

and 2022 (nearly +2.3% on average over the two years), i.e. much more than in 2020 (+0.7%).

The wage bill should increase by around 2% on average over the two years in a context of

stabilization of the index point.

Expenditure by social security administrations (around €660 bn in 2021) should increase

by 3.6% in 2021 before stabilizing in 2022 despite the very sharp drop in crisis expenditure on

health and unemployment insurance

9

.

Health expenditure within the scope of the National Healthcare Expenditure Target

(Ondam) should increase in 2021 by 8.2% on a constant perimeter, driven by expenditure by

the

“

Ségur de la santé

”

(€9.9 bn). It should fall in 2022 (

-1%) under the effect of the expected

drop of n

early €10 bn in measures to deal with the health crisis (mainly vaccines, tests).

Neutralizing this effect, health expenditure should increase by 3.8%, supported by the

measures decided as part of the

“

Ségur de la santé

”

(€2.7 bn in additional expenditure)

.

5

Amount in budget accounting. In the national accounts, this a

mount would be €2.8 bn.

6

This is expenditure included in the scope of the controllable standard

7

Defence: +€1.7 bn, public development aid: +€1 bn, research and higher education: +€0.8 bn, justice: +€0.7 bn.

8

For local authorities and social security administrations, the expenditure figures are understood to exclude

transfers between administrations and follow national accounting conventions.

9

These figures correspond to those of the PLFR 2 for 2021 and the PLF for 2022 revised at the end of October.

D

uring the discussion in Parliament, €1.7 bn in additional expenditure relating to Ondam was voted for 2021,

including €1.2 bn in exceptional expenditure linked to the health crisis and €0.4 bn of consolidated sustainable

expenditure in 2022.

10

Health expenditures are dependent on the change in the health crisis, the fifth epidemic

wave could lead, depending on its duration and intensity, to overshoot the forecasts for 2021

and the provision of €5 bn provided for in the social security finan

cing act for 2022 to deal with

the epidemic.

After reaching a peak in 2020 (€50.1 bn), unemployment insurance expenditure should

fall sharply to stand at €46.1 bn in 2021 and €37.2 bn in 2022, under the effect of the

improvement in the labour market, the reduction in the use of short-time working (-

€8.4 bn

between 2020 and 2022) and the reform of unemployment insurance (-

€1.9 bn in 2022).

All in all, in 2022, the increase in volume of expenditure excluding crisis expenditure

(+1.1%) should be slightly lower than potential growth (+1.35%). However, this position partly

reflects the change in interest expenditure, which should fall by €4.2 bn (

-13.1%) in 2022, under

the effect of the steady drop in rates for several years.

10

and charges paid on lower indexed

securities.

Excluding this effect on interest expenditure, the growth in volume of expenditure not

directly linked to the crisis would not have been 1.1% but 1.5%, i.e. a level close to the

estimated growth of potential GDP (1.35%). Thus, in 2022, the evolution of expenditure

excluding support and stimulus and excluding interest expenditure would not make it possible

to reduce the structural deficit.

D - Actual and structural deficits still very high in 2022, a debt ratio

stabilised at a high level

1 - A still very high deficit

The exceptional scale of the increase in the deficit, which rose from €75 bn in 2019 (i.e.

3.1 points of GDP) to €209 bn in 2020 (i.e. 9.1 points of GDP), resulted from the dual effect of

the deterioration in revenues due to the recession and the massive cost to public finances of

the support measures.

In 2021, according to the LFR 2 forecast, the public deficit will remain high at 8.2 points

of GDP

11

, the recovery in revenue being largely offset by still-increasing public expenditure. It

would thus be at a particularly high level due, in particular, to the maintenance of support

measures and the ramping up of the stimulus plan.

In its opinion on the PLFR 2, the High council of public finances (HCFP) estimated that

the public deficit for 2021 could be

“

slightly lower than forecast due, in particular, to an

underestimation of revenue based on the wage bill

”

12

. In fact, according to its declarations in

mid-January, the Government now expects a deficit of around 7 points of GDP in 2021, notably

under t

he effect of a reduced budget deficit of €34.5 bn compared the LFR 2 forecast, i.e. the

equivalent of the credits of the Public Secondary Education programme, and a social security

deficit that is €8 bn lower than the LFSS forecast for 2022.

While these assessments have yet to be confirmed, notably by Insee at the end of March,

the difference with the underlying deficit forecast in the LFR 2 (-8.2 points of GDP) is significant.

Such a discrepancy, less than a month after the publication of the LFI for 2022, raises the

10

The PLF for 2022 certainly provides for an increase in 10-year interest rates (0.75% at the end of 2022 compared

to 0.3% at the end of 2021) but the new issues replace older securities at higher rates maturing in 2022.

11

The figure associated with the PLFR 2 was -8.1 points of GDP. During the discussion in Parliament of the PLFR

-8.2 points of GDP.

12

Opinion no. HCFP-2021-5 relating to the second Supplementary Budget (Act) for 2021 and the review of the

finance bills and the social security finance acts for 2022.

11

question of the quality of the Government

’

s forecasts on which are based the financial texts

(LFI, LFR 2 and LFSS) submitted to Parliament

’

s vote in the autumn.

Graph n° 4:

public balance in 2019, 2020, 2021 and 2022 (in €bn)

Source: Insee and PLF for 2022 revised

In 2022, the deficit should fall back due to the continued recovery in revenue and public

expenditure, which should fall due to the virtual extinction of economic support measures.

However, the deficit should remain at a high level (-

€129 bn, or

-5 points of GDP). It should

overshoot by almost three points the deficit (excluding the impact of the transformation of the

CICE into a reduction in contributions) prevailing before the health crisis, although economic

activity has returned to its 2019 level in the second half of 2021.

In its opinion of 29 October 2021

13

, the HCFP considered that, given the state of available

information, the public deficit forecast for 2022 could be considered plausible.

The deficit expected in 2022 should overshoot the criterion for triggering the excessive

deficit procedure. However, the derogation clause of the Stability and Growth Pact allowing

Member States to deviate from the normally applicable budgetary requirements due to

exceptional circumstances should be maintained until the end of 2022.

The structural balance should stand at -5 points of GDP in 2022

14

. Even if certain

expenditures which enter into its calculation are expected scheduledto disappear, such as

emergency social expenditure or expenditure for the stimulus plan not financed by the

European stimulus plan, its level remains very high. An improvement in the economic position

would therefore not make it possible to reduce this structural deficit.

13

Opinion no. HCFP-2021-5.

14

When calculated from the potential growth of the PLF 2022.

12

Actual public balance, cyclical balance and structural balance

Changes in the public balance are affected by fluctuations in economic activity. In order to

better assess the position of public finances, it is useful to correct the

“

actual

”

balance for this cyclical

effect as well as for exceptional factors to deduce the

“

structural

”

balance. This calculation is done in

several steps:

-

computation of the

“

potential

”

GDP, i.e. GDP corrected for the economic position, and calculating

the gap between actual GDP and this potential GDP, called the output gap;

-

the computation of the cyclical component of the actual balance, known as the cyclical balance,

which essentially results from the gain or loss of revenue associated with this output gap, assuming

that government revenue evolves almost like GDP (elasticity close to 1);

-

assessment of one-off and temporary measures;

-

the computation of the structural balance by difference between the actual balance and the sum of

the cyclical balance and one-off and temporary measures.

Between 2019 and 2022, the structural balance would thus have deteriorated by 2.5

points under the combined effect of the tax cuts implemented and new permanent expenditure.

Indeed, to the tax cuts decided before the crisis but which had effects on 2020-2022

(reduction of the corporation tax rate, abolition of the housing tax on main residences in

particular), were added those decided as part of the stimulus plan, mainly the reduction in

production taxes for mo

re than €10 bn.

The deterioration in the structural balance also reflects the effect of new long-term

expenditure, the main one being the measure for the revaluation of health and medico-social

personnel under the

“

Ségur de la santé

”

, which would amount to

€10 bn. steady state, i.e. 0.4

points of GDP in 2022.

Graph n° 5: public balance and structural balance (in % of GDP)

Source: Insee, ministry of the economy, finance and economic Recovery

13

2 - The ratio of debt to GDP stabilised thanks to the economic recovery

According to the LFI for 2022 and the LFR 2 for 2021, public debt, relative to GDP, should

stand at 113.5 points in 2022 (after 115.3 points in 2021). It would be nearly 16 points above

its pre-

crisis level. It should thus reach €2,940 bn at the end of 2022, more than €560 bn higher

than its amount at the end of 2019.

In 2021 and 2022, the change in the debt ratio reflects the effect of factors playing in

opposite directions: the public deficit contributes to the rise in the debt ratio, but this effect is

largely offset by the recovery in GDP in value that reduces the weighting of the debt inherited

from the past. Furthermore, the scheduled drop in the level of the central government

’

s

treasury makes it possible to reduce issues and contributes to reducing the public debt.

Lastly, the central government

’

s

“

covid debt

”

ring-fencing measure introduced in the PLF

2022 does not in any way modify the trajectory of the public debt because no new additional

resources, and therefore no new structural recovery efforts, are attached to repayment

15

.

A measure to identify the central government

’

s

“

covid debt

”

in the PLF for 2022

The Budget Act for 2022 identifies the additional central government debt linked to the covid

crisis and provides for a revenue earmarking system to ensure gradual write-off.

According to the Government

’

s computation, the

“

covid debt

”

for the central government

amounts to €165 bn. This debt corresponds to the additional central government deficit in 2020 and

2021 compared to the pre-crisis forecast trajectory. According to the initial Budget Act for 2022, part

of the increase in tax revenue from growth will be allocated to the specific write-

off of this debt: €165

bn in commitment authorisations and €1.9 bn in

payment credit are thus included in the budget bill

for 2022 in the

central government financial commitments

mission. Subsequently, an agreement will

be concluded between the central government and the Public Debt Fund, an administrative public

agency whose mission is to contribute to the amortizationof the public debt, to implement the

amortization over a period of twenty years.

The expected drop in GDP growth after 2022 (1.6% in 2023 after 4% in 2022) will require

further reductions in deficits to stabilise the debt and then bring it down.

In fact, a continued increase in the indebtedness ratio would risk weakening economic

stakeholders

’

confidence in France

’

s capability to honour its past and future commitments.

Ensuring the sustainability of public debt is therefore a matter of sovereignty. This is a

necessary condition for coping with economic shocks, but also for remaining able to finance

the priorities for action for the country, as well as the day-to-day running of general

government.

In 2022, the differences in the position of public finances between countries in the euro

area have increased, making convergence necessary in the years to come. France is on a

very gradual recovery trajectory for its public finances, out of step with its main European

partners. The next public finance programming law (LPFP) will have to specify this trajectory

in a changing European institutional context.

14

A - In 2022, very contrasting public finance positions within the euro area

To mitigate the effects of the health crisis, euro area countries have, like France, put in

place measures to support their economy which have led to a considerable increase in their

debt and their deficit.

In view of the projections transmitted by the euro area countries to the European

Commission in autumn 2021 as part of the draft budgetary plans and focusing on the eight

main countries representing in total almost 90% of the euro area

’

s GDP, two groups of

countries are emerging according to their public finance position in 2022.

On the one hand, there are the countries emerging from the crisis with a very high debt

(close to 120 points of GDP or more) but also with high levels of structural deficits (around 5

points of GDP): France is part of this group with Belgium, Spain and Italy, whose position is

the most degraded.

On the other hand, there are countries which, coming out of the crisis, have a more

moderate level of debt, between 60 and 80 points of GDP, and much lower levels of structural

deficit than the countries of the first group, around 3 points of GDP. This group includes

Germany, the Netherlands and Austria, among others.

Portugal is in an intermediate position, with high debt but a moderate structural deficit. It

benefits in particular from having entered the health crisis with a less degraded structural

balance than that of France, for example

16

.

Graph n° 6: public debt and structural deficit of the eight main euro area countries in

2022 (in % of GDP)

Source: Court of Accounts calculation based on data from countries

’

draft budget plans

For France, this position is the culmination of a movement of divergence that began

fifteen years ago and which saw it in particular move away from Germany. Thus, while the

16

15

level of debt of the two countries was similar in 2006, before the outbreak of the financial crisis,

the French debt was in 2020 nearly 45 points above the level of that of Germany (respectively

115% and 69% of GDP).

This divergence in terms of public finances represents a significant risk of cohesion within

an economic zone grouping States sharing the same currency. The reconciliation of public

finance positions, as provided for in the treaties, should therefore be a major objective of the

post-crisis period. According to the European Commission

17

, it implies in particular that

countries with the most deteriorated positions in terms of public finances, such as France,

make greater consolidation efforts.

B - In France, an uncertain recovery path for public finances

1 - A Government trajectory aiming to reduce the deficit below 3% in 2027, a structural

deficit still high at the end of the period

In the updated draft budget plan sent to the European Commission in October 2021, the

Government presented a trajectory for public finances until 2027 to bring the deficit below 3%

by this horizon and put the debt on a downward trajectory. Thus, in 2027, the actual deficit

would be 2.7 points of GDP and the structural deficit 3.2 points of GDP. With this level of deficit

at the end of the period, the public debt relative to GDP should begin to fall slightly in 2027.

However, the level of public debt expected for 2027, at 115.4 points of GDP, would be identical

to that of 2021. This trajectory notably includes the France 2030 investment plan of more than

€30 bn announced

by the Government.

Table n° 4: multiyear trajectory associated with the revised draft budget plan (in points

of GDP)

2019

2020

2021

2022

2023

2024

2025

2026

2027

Public balance, of which:

-3.1

-9.1

-8.2

-5.0

-4.4

-3.9

-3.4

-3.1

-2.7

- expenditure (excluding

tax credits)

53.8

60.8

59.8

55.7

54.9

54.2

53.7

53.3

52.9

- compulsory levies (net

of tax credits)

43.8

44.5

43.8

43.4

43.5

43.5

43.5

43.6

43.6

Structural balance

-2.5

-1.9

-6.6

-5.0

-4.6

-4.3

-3.9

-3.5

-3.2

Structural adjustment

-0.2

+0.6

-4.7

+1.7

+0.35

+0.35

+0.35

+0.35

+0.35

Public debt

97.5

115.0

115.3

113.5

114.8

115.8

116.1

115.9

115.4

16

This trajectory is built on the assumption that no change in compulsory levies would

occur after 2022, except for tax cuts or increases already decided and having an effect beyond

2022

18

. In the absence of measures to increase compulsory levies, the improvement in the

public balance may result from economic growth and control of public expenditure.

After 6¼% in 2021 and 4% in 2022, economic growth should be 1.6% in 2023 then 1.4%

between 2024 and 2027, i.e. a level very slightly higher than potential growth. With this growth

scenario, actual economic activity would exceed its potential as early as 2022. The output gap

would thus become positive again at +0.4%. Between 2023 and 2027, it would remain more

or less constant at 0.8% on average. Consequently, from 2023, the cyclical component of the

public balance would be almost constant and would therefore no longer contribute to the

improvement in the public balance, which would be of an exclusively structural nature.

Excluding emergency and stimulus measures, expenditure should grow by 0.8% per year

in volume on average over the 2022-2027 period

19

. Under this assumption, the average

structural adjustment over 2023-2027 would be 0.35 points of potential GDP per year. In 2027,

the structural deficit would still be very high at 3.2 points of GDP. It would therefore be higher

than its pre-crisis level (2.5 points of GDP in 2019) and would remain 2.8 points above the

medium-term objective of general government, set before the crisis at 0.4 point of GDP in the

2018 LPFP.

2 - A trajectory that risks widening gaps within the euro area

France is, along with Germany and Italy, one of the rare countries which presented a

public finance trajectory beyond 2022 last autumn. This trajectory covers a period up to 2027

for France, 2025 for Germany and 2024 for Italy.

The comparison of the trajectories reveals an increased divergence. Between 2021 and

2024, the period common to the projections of the three countries, the structural improvement

for France should be 2.3 points of GDP, against 3.8 points in Italy

20

and 5¾ points in

Germany

21

. Consequently, in 2024, while Germany would have almost returned to the

structural balance of its public finances, France and Italy would still maintain high levels of

structural deficits, close to 4 points of GDP.

This divergence is also reflected in the respective levels of public debt. In 2025, French

public debt should be higher than the German public debt by nearly 50 points of GDP. Similarly,

while the level of French debt was lower than that of the euro area excluding France and

Germany between 2009 and 2018, it would be systematically higher than this from 2020.

18

Like, for example, the final

instalment of the reduction in housing tax which would reduce revenue by €2.8 bn in

2023 or the abolition of the tax expenditure on the TICPE on non-road diesel which would increase revenue by

€600 million in 2023 and an additional €300 million in 2024.

19

By using the consumer price index excluding tobacco to calculate the change in volume from the change in value.

20

As part of the European Facility for the Recovery and Resilience of the European Union, Italy is expected to

benefit from €68.9 bn in subsidies, while France expects €39.4 bn in payments from the European budget.

21

The trajectory of Germany transmitted to the Commission is based on compliance with the constitutional rule of

the “debt brake” from 2023. The coalition agreement of 24 November 20

21, published later, guarantees the

implementation of these constitutional provisions from 2023 and the financing within this framework of investments

for the future.

17

Graph n° 7: public debt in Germany, France and the euro area (in points of GDP)

Source: draft budgetary plans for France and Germany and European Commission for the euro area excluding

France and Germany (autumn 2021 forecast)

3 - Significant uncertainties that affect the trajectory construction hypotheses

The main uncertainties surrounding the trajectory concern the economic environment

and in particular the lasting effects of the crisis on both the level and the growth rate of potential

activity and the expected level of actual growth.

a) The impact of the crisis on potential activity

In the scenario adopted by the Government, the crisis would have a lasting effect on the

level of potential activity, estimated at 1¾ of a point of GDP. These losses in potential activity

would reflect the reduced investment by companies during the crisis and the effects of the

lasting removal of some people from the labour market. A phenomenon of the same type was

observed after the 2008 crisis, but on a much larger scale because the level shock had reached

almost 5 points of GDP.

The assessment of this impact has been reduced since the April 2021 stability

programme when it was 2¼ of a point of GDP. In fact, since April, growth for 2020 has been

reassessed upwards with, in particular, better resilience of business investment and

employment.

There is still considerable uncertainty surrounding the assessment of this impact, as

evidenced by the various computations made by international organisations. For example, the

OECD considers that there was no impact of the crisis on the level of potential activity but that

potential growth at the end of the crisis would be weaker than before the crisis.

18

b) Potential growth at the end of the crisis

According to the revised draft budgetary plan, the potential growth rate beyond 2022, set

at 1.35%, would not be modified by the crisis and would even be higher than that observed

over the ten years preceding it (1.25% between 2010 and 2019). This movement would break

with the dynamic observed for twenty-five years of declining potential growth.

The choice to retain higher potential growth at the end of the crisis is motivated by the

expected effects on growth of the measures put in place by the Government, such as those

contained in the stimulus plan or in the

“

France 2030

”

plan. Even if this growth rate is not out

of reach, observing what has happened over the past thirty years could have led to maintaining

the pre-crisis potential growth rate and waiting to see lasting effects of measures on growth to

accept a higher assumption. Accepting, as was often the case, an overly favourable potential

growth assumption weakens the achievement of the objective of restoring public finances.

Graph n° 8: potential growth (in %)

Source: Court of Accounts calculation based on data from the General Directorate of the Treasury

19

c) The expected level of growth

The growth scenario adopted by the Government is constructed in such a way that the

output gap is almost constant and positive from 2023 at 0.8 points of GDP on average. Such

a choice of constructing the medium-term trajectory of public finances has already been

commented on by the HCFP in the past, particularly when it issued its opinion on the previous

LPFP

22

. The HCFP thus indicated that

“

the assumption of a positive output gap at the end of

the period is rather optimistic [...] since in the medium term the average effective growth is

determined by potential growth

”

.

Even if, considered separately, the choices made in terms of growth scenario and

potential growth (higher at the end of the crisis than before the crisis) are not overly optimistic,

their accumulation may call into question the objectives that the Government has set itself in

the multiyear trajectory.

Thus, in a scenario where potential growth would be maintained at its pre-crisis level (i.e.

1.25%) and economic activity would return to its potential level in 2022

23

then grow as potential

growth, the deficit would overshoot 3 points of GDP in 2027. Similarly, the debt would no longer

decline and would reach almost 120 points of GDP by that time.

4 - A trajectory that presupposes greater expenditure control than in the past

In the trajectory associated with the updated draft budget plan, the growth ratio of public

expenditure in volume

24

, necessary to fall below 3% of the deficit in 2027, would be 0.4% on

average over 2023-2027.

This growth of 0.4% is significantly lower than that observed over the last decade before

the crisis (1% on average from 2010 to 2019). Compared to the pre-crisis growth rate, which

already incorporated savings measures, nearly €9 bn in additional savings each year would

therefore be necessary to achieve the objective of the multiyear trajectory attached to the

revised PLF 2022. The articulation of these efforts to curb expenditure with the sectoral

programming laws passed earlier will be a particular challenge. If they make it possible to set

a horizon for important public policies, these sectoral laws also have the effect of rigidifying the

trajectory of all expenditure.

22

Opinion no. HCFP-2017-3, relating to

public finance programming bill for 2018-2022

.

23

In this scenario, forecast growth would be reduced in 2022 (3.6% rather than 4%) as well as in 2023 (1.35%

versus 1.6% in the RESF).

24

Excluding tax credits, deflated by the GDP deflator.

20

Graph n°9: growth of public expenditure in volume (in %)

Source: Court of Accounts calculations based on Insee data and forecasts from the economic, social and financial report of

October 2021. Volume data was calculated using the GDP deflator

C - A programming law to be built in an evolving European framework

In his report entitled

“

A public finance strategy to exit the crisis

”

, carried out at the request

of the Prime Minister

25

, the Court of Accounts recommended that the trajectory of public

finances over the next five years be included in a programming law voted in autumn 2022 and

covering the entire legislature. This trajectory would be part of a context of re-examination of

the rules of governance of European public finances. It should be based on tighter control of

public expenditure, making the implementation of structural reforms even more necessary.

1 - The lifting of the safeguard clause and review of European rules

Following the outbreak of the pandemic in March 2020, the European Commission

activated the general derogation clause of the Stability and Growth Pact, allowing countries to

fight the pandemic without being constrained by existing public finance rules.

When publishing the documents relating to the

“

European semester

”

of June 2021, the

Commission indicated that the deactivation of this clause was linked to the return of economic

activity to its pre-crisis level. In view of its spring forecasts, this led to maintaining the clause

in 2022 but probably deactivating it in 2023.

25

21

The prospect of lifting the general derogation clause raises the question of the evolution

of European rules all the more acutely as the significant increase in indebtedness levels due

to the crisis makes it difficult to apply some of these rules, such as that on the convergence of

debt levels towards 60 points of GDP.

In its June 2021 report, the Court had recommended aiming for a simple rule that is not

pro-cyclical, that favours investment and that relies more than today on independent budgetary

institutions. These audit recommendations are in line with the conclusions reached by the

European Commission in its review of economic governance published in February 2020

26

.

In its communication of 19 October 2021

27

, the European Commission relaunched a

consultation on public finance rules with the aim of reaching a broad consensus within a

timetable compatible with their implementation in 2023. If the conditions for a modification of

the Treaty of the European Union do not seem to be met, a modification of the texts specifying

European budgetary rules

28

as well as the definition of flexibilities in their implementation

presuppose negotiation time to gather a sufficient majority of countries. In the absence of new

rules or flexibility of interpretation, the current budgetary framework would remain applicable

and would place France in a position of excessive deficit from 2023.

2 - The conditions for a controlled trajectory for the recovery of public finances

The next public finance programming law will be part, from the 2023 financial year, of a

renovated organic framework. The organic law of 28 December 2021

29

strengthens in

particular the monitoring of expenditure objectives, with in particular the introduction of a rule

for expenditure in euros

30

and its follow-up in the introductory article of the budget acts, as well

as the follow-up of debt sustainability with the presentation to Parliament, before the start of

the ordinary session, i.e. in September, of a Government report on it.

This new programming should pursue two long-term objectives: to strengthen potential

growth and to implement tighter control of public expenditure. To this end, expenditure reviews

would strengthen the capability to act on lower priority expenditure.

Significant reforms will be needed in some areas to curb the pace of expenditure and

improve its efficiency. In its June 2021 report, the Court had thus identified five key sectors:

the pension system, health insurance, employment policy, social minima and housing policy.

In addition, to shed light on the challenges of the coming years and the levers that could make

it possible to meet them, the Court published in autumn 2021 a series of notes on several

major public policies

31

.

26

Communication from the European Commission, Review of economic governance: report on the application of

regulations 1173/2011, 1174/2011, 1175/2011, 1176/2011, 1177/2011, 472/2013 and 473/2013.

27

Communication from the European Commission, The economy of the European Union after covid 19: implications

for economic governance, 19 October 2021.

28

The preventive and corrective aspects of the stability pact were reformed in November 2011 by five regulations

and one directive (“

six pack

”) and in May 2013 by two regulations (“

two pack

”).

29

Organic Law no. 2021-1836 of 28 December, 2021 on the modernization of public finance management.

30

For all general governments but also for each sub-sector (APUL, ASSO, central government and ODAC).

31

Continue to adapt the pension system to reduce deficits and strengthen equity

;

Universities by 2030: more

freedoms, more responsibilities

;

Support the agro-ecological transition; Improve the management of the public

service of justice

;

Electricity production choices: anticipate

and control technological, technical and financial risks

;

The management of human resources at the heart of the difficulties of the national police

;

Restore the coherence

of housing policy by adapting it to new challenges

;

The French rail network: significant changes but necessary

choices to come

;

A more efficiently organised school at the service of students

;

The integration of young people

into the labour market

;

Adapt industrial policy to new challenges

;

Health: guarantee access to quality care and

reduce the health insurance deficit

;

Refocus the missions of the ministry of culture

.

22

In order to put the debt back on a downward path by 2027 to ensure the sustainability of

our public finances and rebuild budgetary leeway to deal with the next crisis, it will be important

to show realism in the construction of the trajectory recovery of public finances. This realism

must apply as much to the forecast of the amounts of savings to be expected from the reforms

that will be implemented as to the macroeconomic scenario chosen (see

above

). Otherwise,

there would be a high risk of not achieving the objectives set or of having to take emergency

recovery measures to stay on the chosen trajectory, thus affecting its credibility.

Budget management for 2022, like the next programming law, will finally have to be

based on simple principles, such as, for example, allocating

“

good surprises

”

on revenue to

debt reduction and not to the financing of reductions in compulsory levies or new perennial

expenditure.