The vocal transcription is done via an AI
The new French Prime Minister will be faced with the management of public finances.
The question must be understood in three dimensions.
1️- The long-term vision
The public debt-to-GDP ratio declined for a long time in the post-war years, reaching a low point in the mid-1970s at around 20%. Since then, this ratio has increased almost linearly to 113.2% by the end of 2024.
Each year, the needs of the French economy, reflected in the rate of public debt, are growing faster than GDP. The main reasons are the rise of the social model, whose expenditures have increased from 15% of GDP in 1960 to 33% in 2023, as well as the job-tax relief measures, which represent 80 billion in 2024 according to the Bozio/Wasmer report. At the same time, expenditures on general and regulatory government services are stable or even declining.
As for GDP volume growth, it is slowing down, falling from a trend of 2% from the first oil shock to the Great Recession to now 1%.
The social model is not aligned with the economy’s capacity to generate revenue. Public debt is the shock absorber that is now reaching its limits. The French have never been able to resolve this equation between social needs and production capacity.
2️- Economic regulation
It is that of the budget, that of the framework so that the debt is aligned in year n on a sustainable trajectory.
Two issues
🅰️ The whatever-the-cost approach was a mutualization of risk. The State paid for both the cost and the risk. It is not abnormal, now that the risk has passed, for the situation to normalize to the benefit of the State.
🅱️ Debt stabilization requires a shift from a public deficit excluding interest payments of -3/-4% of GDP in 2023/2024 to +1%. Depending on the pace of the budget, the amount saved will be between 20 and 40 billion per year.
3️- Tell a narrative
Focusing budgetary discourse on debt, its amount, and its cost is counterproductive because every citizen and every business quickly realizes that they will be made to contribute through loss of benefits or additional taxes. It is rational to be against any painful discourse on the imbalance of public finances. Effective reforms are only made when they do not appear necessary.
We need a narrative about the future of the French economy and society. Climate change, decarbonization, military spending, an aging population, and the shift in the global economic and political balance are all sensitive issues that must be factored into the budgetary equation and all must be included in the narrative.
Every French person must be able to adhere to it so that their horizons become more distant allowing them to take risks. Without this, budgetary imbalances and sluggish growth will be permanent landmarks.