Next month, the three main notation agencies will give a decision on the France notation, already put by two of them under negative prospect. It is likely that a downgrade occurs at a time when the State financing needs for the current year will reach a record level with 285 billion of mid and long-term bonds to be issued. 2023 public accounts are going to be updated. A GDP 4.9% deficit had been announced but a 5.5% level is now published. Against the announced objectives and the taken commitments, France will have known in 2023 an aggravation of its financial situation.
The ratio between the deficit and the GDP has suffered a double negative evolution. The denominator, the GDP, has known a less important than forecasted growth, which has generated lower fiscal receipts and so, for the numerator, a higher deficit when no expenses reduction had been decided. The public indebtedness ratio, above 110%, has been affected in the same way by a higher public deficit and a lower GDP growth. The 2023 fiscal year would have constituted a step in the recovery of the France public finances. To the contrary, it has known a degradation which will not let notation agencies indifferent.
The 2024 year is not announced as a better one. The economy has stagnated during 2023 2nd half. The acquired growth, to the difference of last year, is so very low and the government would announce a downgrading revision of its forecasts with a growth rate inferior to 1%. It is in this context that the Minister of finance has announced a program of public expenses reductions of 10 billion along with alerting the public opinion about the seriousness of the country indebtedness. That alarming message is a tradition when it is wanted to make accepted unpopular measures. But that speech is a paradox at the eve of the decisions of the notation agencies because they will be more influenced by the critical analysis about the financial situation of the country than by the modest measures announced to remedy to it.
The government is not the only accountable for this degradation. The interest rates increase has weighted on the public debt charge by near fifteen billion in two years. The cost overrun first comes from the short-term rates on Treasury bonds which had been nil or even negative these last years. They represent a charge above five billion this year. The cost of the indexation of the bond coming at maturity in July will be near 6 billion. The advantage offered by the amortization of the past bonds carrying high rates and their replacement by bonds carrying lower rates will disappear when the State and local authorities will have to support the consequences of rates now near 3% for the future bonds.
Despite this unfavorable environment, investors are testifying a very strong appetite for the French debt bonds and every issuance is the purpose of a demand two to three times higher that what is offered. The 10 years rate (2.85%) remains by large inferior to Italian and Spanish rates and the spread with Germany has a trend which is reducing. The spread last year on that duration had reached near 60 basis points and it fell back to around 45 basis points. Explanation is simple. The level of the public debt is not the only indicator to take into consideration. It is necessary to measure the country reimbursement capacity and to integrate the point that the European Central Bank has been in the past theit first subscriber and detains, according to Blomberg agency, near 30% of the State bonds, resulting from supporting programs adopted during the Covid-19 pandemic and extended until the end of this year regarding the reinvestment of the amount of the bonds come at maturity.
The other reinsuring factor is the very high level of the household financial saving rate which has persisted during 2023 and has reached during the 4th quarter 7% of the gross available revenue. This one was in the past between 3 and 4%. It reveals the household worries about the future, which weights on growth because these ones invest less to acquire a home and they consume less. The level of their financial assets, life-insurance, saving plans and deposits overpassed 6 300 billion, i.e. near the double of the level of public debt under the Maastricht definition. The point according to which this generation will transmit to the following one this heavy debt is so fallacious, because in the same time than the debt this generation will inherit of what is necessary to reimburse it and atop of that, nothing will impeach it to also transmit the debt to its successors.
This situation is sometimes compared to the German one. But two essential points are forgotten. During the past decades, our neighbor has spent much less money to assure its defense and inhabitants have a pension regime partly with capitalization which artificially inflates their saving rate. The debate about public debt is so biased and is used to mask another debate highly more important regarding the utilization of the public money. The persistency of high public deficits results mainly from economic policy mistakes and from the growing bureaucratization of the French society, which hurts productivity and growth.
The persistency of a supply-side policy, costly regarding public finances, for ten years is unjustified because it has brought the proof of its inefficiency. The manufactured goods foreign exchanges are more and more in deficit and it has not impeached large groups having sometimes the State as a shareholder as Renault to proceed to de-localizations or to ruinous foreign acquisitions which put them into danger or which made them passing under foreign control.
As another example, the energy policy with the abandon of the priority given to nuclear as a tool to reduce greenhouse gas emissions and as an element in favor of the energy independence along with the closure of the Fessenheim power plant, has cost to the State tens of billion euros and has hurt the competitiveness of the energy-intensive industrial sectors. The current duty, which is also costly, of the re-industrialization would be much less justified if all these mistakes did not occur.
At last, the growing bureaucratization of the daily life of enterprises and household weights on the productivity and the purchasing power at a moment when the degradation of the public services has never been so much perceived when these ones continue to benefit from huge public financings. It results from that an investment fall from enterprises and a worried behavior from household their financial situation does not justify for a vey large majority of them. So has started a self-kept cycle of unbalanced public finances where everybody is the loser.
The level of the public debt frightens and it is understandable. But it doesn’t present an immediate danger. Thanks to the euro, there is no need to have recourse to foreign investors and if a downgrading by the notation agencies had to generate in the future a higher cost regarding the public debt, that would make even more indisputable a reassessment of the public policies and a reorganization of the administrations to reduce its excessive costs and its inefficiency.