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AB 2000 studies

Alain Boublil Blog


France and its public debt

As every year at the same time, France National Audit Office has published its report on the management of public finances during the previous year. Its criticisms are harsh about the functioning of some public services or establishments and its conclusions are alarmist on the evolution of the State deficit and its indebtedness. But if the analysis which have the qualities of a detailed audit of an identified case as the one regarding Polytechnic School for instance are indispensable and convincing because they attract attention on the failures and carry elements allowing the State to remedy to them, the macroeconomic developments on public finances are disputable because the chosen criteria are not always appropriate and especially the risks are overestimated.

The warnings on the level of the debt and of the deficits are not new ones. In 2019 they over passed again 3% due to the cumulated effect on the same financial year of the tax credit granted in 2018 to reduce social charges and its transformation into a permanent charges reduction in the considered financial year. Logically, the following financial year deficit would significantly return under 3%, a ratio considered by European rules as a limit not to overpass. It remains that year after year the deficit, even if it is reduced, contributes to the public debt increase and it is the point the National Audit Office is putting forward to justify its critics about the State policy. Public debt, in absolute value and as it is posted in the European Treaties will continue to increase in 2020 and remain near 100% of the GDP. That would constituted a double risk, if there is an interest rates rebound and, even more worrying, because of the doubts that the level of that debt could weight on the ability to reimburse it.

The first critic reveals, deliberately or not, an incomplete analysis of the bounds markets. Under the cumulative effect of the European Central Bank policy, the increase of the risks in the world, and the last one with the threat of a major epidemic is not the least one which incite investors to look after the safest assets, and the very high saving rate of French household, the level of interest rate has never been so low since the beginning of the year. It has fluctuated, for the 10-year OAT around -0.10% and has even fallen to -0.30% on February 28th. So the State has been able to issue around 50 billion euro of mid and long-term bonds, i.e. more than a quarter of the forecast issuances for the whole year. Interest rates charges in 2020, according to Agence France Trésor calculations, will be near 36 billion. It was superior to 40 billion three years ago. The fall would have been even more pronounced if the agency had not during the past, under the pretext of securing the liquidity of some previous securities, issued bonds carrying interest rates superior to market rates and pocketing substantial issuances premiums.

The risk, frequently put forward, which would weight on the country financial equilibriums of an interest rates increase, is very largely overestimated for two reasons. The debt carries fixed interest rates.  And an eventual rebound would only have consequences on new issuances, and with a one year delay. The average maturity of French bonds has over passed, in 2019, eight years. So the impact of an interest rates increase on the amount of paid interests would be very slow and offset, year after year, by the reimbursement of past and costly loans. In 2019 came at maturity two bonds, the first one for an amount of 32.7 billion carrying a 3.75% rate and the second one, 29 billion at 4.25%. They will be refinanced by bonds carrying negative or near zero rates and the reduction of the cost of the debt in the following years will be superior to 2 billion euro. To these accounting and indisputable reasons must be added the circumstances which could be at the origin of a change in the ECB monetary policy or of the international environment generating the rates rebound. But in that case, an inflation or growth rebound would have consequences on fiscal receipts much superior to the additional costs provoked by an interest rate rise.

In fact, the alarmist message on public indebtedness, which has, as a purpose, to put pressure on the State to incite him to make savings has not much foundation because it is based on a wrong indicator, the ratio between the debt and the GDP. But if, which is much more logical, that debt is compared to household wealth, we realize that the ratio has had few evolutions for near 25 years. In 1995, the public sector net debt measured by INSEE corresponded to 34.4% of the household financial wealth. In 2018 that ratio was 39.2%, despite the financial markets fall at the end of that year. That results from a very high household saving rate. It reached in 2019 14.7% of the gross available revenue, including a financial saving rate of 4.3%.

So this message has no real basis. The true issue, it is how is it possible that, with such a high level of public expenditures and transfers, French people discontent, which appeared with virulence for more than a year, is so high. The answer, which has been hardly evocated in the National Audit Office report, lies in the contrast between the situation of public services, among the best in the world and on which pressure is put and which need more resources, and that of the many administrations to which have been added, year after year, dozens of organisms of all kinds, Authorities, Agencies, Councils and so on… whose managing costs is not stopping to increase. To that must be added the many levels of local institutions, without any equivalent in Europe, which have proliferated after the decentralization, without the State whose missions had been transferred, reduces the number its own staffs.

The real administrative labyrinth which, year after year, has been constituted went along with a more and more complex legal and regulatory environment, the bureaucrats finding in the proliferation of texts (Working and Tax codes have thousands of pages) a supplementary reason to increase their hold on the economy which weights on management costs. That administrative environment, whose achievements are frequently poor and rightly denounced by the National Audit Office, as when hundreds of millions have been spent and lost to transfer on computers civil servants and militaries payrolls, put also on enterprises constraints which constitute supplementary management costs and affects their competitiveness. The bureaucratization of the French society also results from the State and local Authorities incapacity to efficiently provide the missions they have been entrusted. There is one of the major if not the only cause of the persistence of public deficits and of the increase of the debt, if not the main one.

The policy followed for several years, instead of remedying to this major failure of the organization of French society, consists of putting the weight of these who grant public services essential missions in order to restore public finances, with the risk to downgrade the  quality of these essential services, along with protecting inefficient administrations. So it is not surprising that this policy generates a deep rejection from French population.        


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