Is the better than expected level reached by the public deficit in 2021 a surprise?
It was known that the government had been cautious both for the level of growth, but also for that of revenues, on the assumption that the latter would progress like growth. In fact, they grew faster, so the reduction in the deficit is stronger than expected . Admittedly, this remains at a high level, but it should be noted that in terms of growth, the crisis resulting from the pandemic has been absorbed more quickly than expected. Especially since it cannot be ruled out that INSEE may revise the figures upwards again in the coming months.
The improvement in public accounts comes as the crisis in Ukraine is pushing all governments in Europe to pull out the checkbook. Is it already the return to “whatever the cost”?
In any case, the invasion of Ukraine reshuffles the cards. The 2023 budget should normally be that of the start of budgetary consolidation. But it will be a war economy budget and, in a war economy, it is complicated to apply budgetary rigor. In the short term, spending to cushion the shock of soaring energy prices is inevitable. Especially since the relative improvement in the accounts in 2021 opens up room for maneuver for 2022. And we must add to this in the medium term all the new credits already in the pipes for the armies or the security forces.
So is the return of the deficit to 3% of GDP still a long way off?
In any case, it seems inevitable that the Stability Pact will be put on hold again for at least a year, to digest this war economy. Beyond that, we know that these European rules will have to be reviewed anyway, so that they do not prevent the necessary investments, in particular for the ecological transition. This is all the more true with the problems of energy dependence highlighted by the Ukrainian crisis. From this point of view, this could push Germany to move forward on this project.
What does the return of inflation change for the public accounts?
If inflation weighs on the wallet of the French, on the other hand it can have positive effects on the public accounts with an increase in tax receipts. We know, for example, that income tax (IR) scales can be imperfectly indexed to inflation and therefore income from IR could increase much more strongly. We must accept a smoothing of prices on the horizon of the next five-year period, which will allow us to finance through tax revenues the sums that have been spent to deal with the energy crisis. On the other hand, inflation should push up certain expenses such as pensions.
For France, there is no major short-term debt problem.
What impact for the debt?
The key variable remains the interest rate. As long as this remains lower than the addition of the growth and inflation rate – and this seems most likely today, the ECB being also careful not to penalize countries like Italy with high rates – , then this can contribute to strengthening the sustainability of our public debt.
For France, there is therefore no major short-term debt problem. But it is still necessary to know what this debt is used for. It is not the same thing to invest in ecological transition or industrial sovereignty, and to spend only to compensate for losses of purchasing power as advocated by Marine Le Pen. Such a strategy cannot be financed in the long term.
Are the multiple crises bringing us into a new budgetary world?
In fact, this new world has emerged since around 2017, when interest rates began to fall below the combined level of growth and inflation. This profoundly modifies the questions surrounding the sustainability of our indebtedness.
In this new world, several strategies are possible. We may want to take advantage of low interest rates and inflation to get out of debt, which seems to be Valérie Pécresse’s choice. Another strategy, it is possible on the contrary to assume a strong investment strategy to prepare for the future, as recommended by Jean-Luc Mélenchon without too many limits.
Emmanuel Macron navigates a little between the two, betting on growth to reduce deficits and assuming a level of investment that is not necessarily ambitious. It is possible that the latter is counting on a reform of the Stability Pact to beef up its investment policy.