The new restrictions decided by the French government do not constitute a true lockdown but they will weight again on economic activity. Household will spend less and enterprises won’t definitely see a signal encouraging them to invest. Growth, they are thinking at Bercy, wouldn’t be much impacted. Retail shops which must close in more than one third of the country will receive supports to go through that new ordeal but amounts are not considered as important enough to review budget forecasts. But all that will only increase public debt without the growth comeback generates enough resources to guarantee its reimbursement, are saying, with an alarmist tone, various oppositions. So the debt issue is still at the center of the political debate and wouldn’t leave it until presidential elections.
That debate became even more intense with the moves occurred on financial markets after the vote by the American Congress of the rebound plan (1 900 billion dollars) decided by Joe Biden. Even if the American central bank has tried to calm the atmosphere with the announcement that it will keep interest rates at a low level until at least 2023, financial markets has considered that this plan will generate an increase of internal demand and tensions both on production capacities and on job market. An inflation rebound, even a temporary one, is possible, which would constrain the Fed to intervene. Until now, American interest rates rise has been modest, 0.15 to 0.30%, on ten years maturities but they could be the announcement of a different world with the end of deflation which we know for several years.
The impact on French rates has been quite also symbolic. At the beginning of the year, the State was issuing 10 years bonds carrying a -0.30% rate. March issuances with that maturity have been done with a rate around -0.10%. But even if it was symbolic, that increase has been perceived as the announcing signal of a rebound able to make heavier the national indebtedness charge and so as a threat. But this message, which is always well received in media and in the public opinion, is groundless. In the year 2021, the State debt charge will be 34 billion euro, i.e. near 8 billion less than five years ago. As the rate the State pays is near zero, the indebtedness increase resulting from the pandemic has no cost and will not cost anything until its coming at maturity. Atop of that, in 2021, the state will reimburse in April a 28 billion bond carrying a 3.75% rate and in October a 37 billion one carrying a 3.25% rate. So, starting next year, as the State will have financed these two reimbursements with negative or nil rates, it will take profit from a new reduction of its debt charge of 2.2 billion euro.
The true issue, it is why the State was already so much indebted (100% of its GDP) at the eve of the pandemic. The answer, we always hear, is that “we made only mistakes for thirty or forty years”. But that explanation is wrong. The truth, it is that in 1993, the French public indebtedness ratio was only 45.8%, the lowest, to the exception of Luxembourg, in the European Union where the average was 66.4%. Germany was more indebted than France (50.2%) as Japan (68.3%) or the U.S. (64.3%). During the Eighties, the budget deficit never over passed 3% and the indebtedness rate reached in 1993, after a strong increase for two years, was mainly resulting from the sharp recession occurred at that time. The situation went worse during the following decade and amplified during and after the financial crisis which affected the world in 2007-2008.
The real cause of the current indebtedness is to be found not in the insufficient reforms put in place for fifteen years but to the contrary the inappropriate content of these ones. The principle consisted in reducing taxes and social charges weighting on enterprises and in compensating losses of receipts by an increase of fiscal charges on household. But the compensation never could be a full one for obvious political reasons. Especially, the reasoning according to which the reductions which will benefit to enterprises will be used to investing and to creating jobs has been contradicted by the facts as the analysis according to which high labor costs were the cause of enterprises losses of competitiveness.
The “Research Tax Credit”, instituted in 2004 in its current form and the removal of its ceiling in 2008 costs every year several billions euro. The Sanofi inability to produce as quickly as its competitors a vaccine against the corona virus has been immediately interpreted as the proof of French research decline. To what all these billion have been used, we would be tempted to ask us? We can say the same about the charges reductions decided from 2012 and the corporate income taxes reductions which, them, have cost tenths of billions euro. Their partial compensation through household income tax rises has been the main cause of the near-stagnation of the French economy for near ten years. That stagnation went along with, atop of it, an unprecedented degradation of French trade balance. Manufactured goods exports increased between 2000 and 2020 by 29% when imports rose by 53%. Enterprises have used the new margins given by these charges reductions to develop foreign investments and even sometimes to delocalize their activities.
At last, the State has preferred to put the pressure on public services to spend less, the consequences are seen today on the hospitals situation, and to spend the saved money through the multiplication of bureaucratic institutions. The decentralization was supposed to reduce its tasks. It is the opposite which happened. Each time a responsibility or a mission was transferred to local authorities, the State created organisms to survey them along with giving itself at the national level a multitude of organisms to advise it or to be used as corresponding partners of the economic and social actors. There too, the sanitary crisis has been a powerful discloser with its judgment mistakes and messes like these which just have happened about residents certificates in the regions which were the most affected by the pandemic.
So the State is doubly responsible of the public indebtedness: the economic policy followed since the beginning of the years 2000 has penalized growth and has not permitted to generate enough resources to finance public expenditures with, as a consequence, the public debt rise. Since that time, governments went the wrong way. Instead of attacking welfare State and public services, reforms would have, as a priority and even as an urgent task, chosen to attack the operating costs of the State itself. It would have made economies through the suppression of the many useless organisms. It would have allowed to economic agents to reduce their costs in avoiding having to cope with the bureaucratic complexities which have been amplified during these last two decades.
The debt is a major issue, not because of the financial risks it would create for the country, which are by large over estimated, but because it is revealing the economic policies mistakes made by the successive governments and the bureaucratic derive which took control of the country. It is that which must as a priority be reformed and that should be a central point of the coming presidential election.