Is the higher-than-expected government deficit in 2021 a surprise?
We knew that the government was cautious about both the level of growth and the level of income, assuming that the latter would develop in the same way as growth. In fact, they grew faster, so the deficit reduction is stronger than expected. Admittedly, this remains at a high level, but it should be noted that, in terms of growth, the crisis caused by the pandemic was overcome faster than expected. Moreover, it cannot be ruled out that INSEE may again revise the figures upward in the coming months.
The improvement in public accounts comes as the crisis in Ukraine forces governments across Europe to pull out the checkbook. Is this already a return to “at any cost”?
In any case, the invasion of Ukraine changes the cards. The 2023 budget should generally be the start of fiscal consolidation. But this will be the budget of the war economy, and in the conditions of the war economy it is difficult to apply budgetary rigor. In the short term, spending on mitigating the effects of a sharp rise in energy prices is inevitable. Especially since the relative improvement in the accounts in 2021 opens up room for maneuver in 2022. And we must add to this in the medium term all the new loans that are already in the pipes for the armies or law enforcement agencies.
So, the return of the deficit to 3% of GDP is even further?
In any case, it seems inevitable that the Stability Pact will again be delayed by at least a year to digest this war economy. In addition, we know that these European rules must in any case be reviewed so that they do not hinder the necessary investments, in particular for the ecological transition. This is all the more true of the problems of energy dependency that have come to light as a result of the Ukrainian crisis. From this point of view, this may push Germany to move forward with this project.
What changes the return on inflation for government accounts?
If inflation weighs on the French wallet, on the other hand, it can have a positive impact on public accounts by boosting tax revenues. We know, for example, that income tax (IT) scales can be imperfectly indexed to inflation, and therefore income from NI could increase much more. We must agree to price equalization over the next five-year horizon, which will allow us to fund from tax revenue the amounts that have been spent to overcome the energy crisis. On the other hand, inflation should lead to an increase in some expenses, such as pensions.
For France, there is no serious problem with short-term debt.
What is the impact on debt?
The key variable remains the interest rate. As long as this remains below the addition of growth and inflation – and this seems most likely today, the ECB is also careful not to penalize countries like Italy with high rates – then it can help build the resilience of our society. duty.
Thus, France does not have serious problems with short-term debt. But you still need to know what this debt is used for. Investing in ecological transition or industrial sovereignty and spending only to compensate for the loss of purchasing power, as advocated by Marine Le Pen, are not the same thing. Such a strategy cannot be funded in the long run.
Are multiple crises ushering us into a new fiscal world?
In fact, this new world has come about since about 2017, when interest rates began to fall below the combined rate of growth and inflation. This fundamentally changes the issues related to the sustainability of our debt.
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 Valerie Pecresse’s choice. The other strategy, in contrast, allows you to adopt a strong investment strategy to prepare for the future, as recommended by Jean-Luc Mélenchon, without too much restraint.
Emmanuel Macron weaves a bit between the two, betting on growth to reduce the deficit and assuming an investment level that isn’t necessarily ambitious. It is possible that the latter is counting on the reform of the Stability Pact in order to strengthen its investment policy.