France’s 2019 budget: no signs of consolidation

Earlier this month it transpired that France would not be able to meet its deficit target this year due to the weaker economic development. This was attributed to the very weak state of the economy to date and also to the government’s assumption of the debt of the state railway SNCF which was transformed from a state-owned company into a private railway in the spring by means of a reform. At 1.7 percent, economic growth is likely to be 0.2 percentage points lower than previously assumed. For this reason, new debt will not fall to 2.3 percent of gross domestic product (GDP) in 2018 as the government had targeted, but can be expected to pan out at around 2.6 percent, roughly the same level as in the previous year.

The government has written over the weaker growth and, by extension, the poorer budget figures into the coming year. Economic growth for 2019 is now estimated at a rate of 1.7 percent instead of the previously assumed 1.9 percent. The government therefore also wants to break away from the path of deficit reduction. Compared with 2.7 and 2.6 percent in 2017 and 2018 respectively, the government is now budgeting new debt of 2.8 percent of GDP for the year ahead. Specifically, the government aims to ease the burden on private households by up to 6 billion euros in the coming year. Companies are to be offered relief worth around 20 billion euros. Is Macron trying to improve his sentiment readings with the budget? Since no consolidation is discernible, there are good grounds for this suspicion. The debt-to-GDP ratio is expected to reach 98.6 percent compared with 98.7 percent this year. A reduction in the debt ratio has therefore been removed from the agenda.

No real consolidation can be seen in the figures now presented. Macron is thus almost as far away from his pledge to cut 120,000 job in the public sector as he is from his goal of presenting a balanced budget by the end of his term of office in 2022. The EU Commission has yet to evaluate the budget. The fact that the cyclically-adjusted structural deficit of 0.3 percentage point is declining less sharply than the originally targeted reduction of 0.6 percentage point is highly unlikely to find favour with the EU Commission.

The growth assumption of 1.7 percent is not unrealistic, but it is altogether optimistic in our view. If the French economy remains mired in this bout of weakness, new budget revisions are on the cards. With no changes in spending behaviour, the debt ratio can also be expected to remain high.


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