OECD warns France’s deficit projections are too optimistic

The French government’s deficit reduction projections are not realistic, the Organisation for Economic Cooperation and Development (OECD) found in a report published on Wednesday (29 November), stating France ought to “step up the pace of fiscal consolidation”.

• French government expects deficit to fall to 4.4% in 2024 and 3.7% in 2025, while OECD predicts it will remain at 4.9% in 2023 and 4.6% in 2025
• OECD calls for additional efforts to reduce government debt and boost potential growth through green alternatives, housing renovation, and energy savings
• This fits with the Commission’s European Semester opinion, which hinted that the country may be subject to an Excessive Deficit Procedure come the spring

According to the OECD, a group of the world’s richest nations, “the budget deficit [for France is] projected to narrow from 4.9% of GDP in 2023 to 4.6% in 2025”. Such numbers are significantly different to those of the French government, which expects deficit levels to fall to 4.4% in 2024 and 3.7% in 2025.

General spending reductions are due to an overhaul phase-out of the ‘energy shield’, first implemented in early 2022 after the start of Russia’s invasion of Ukraine to protect consumers from runaway energy prices – but the reductions are not going fast enough, the OECD warns.

The international organisation’s annual Economic Outlook report, published on Wednesday, shows particular concern that budget reduction policies and objectives aren’t ambitious enough, such that “additional efforts will be necessary to reduce government debt more substantially”.

A 2024 budget bill is currently making its way through the French Parliament. At its heart are the expectations that deficit levels fall under the sacrosanct 3% threshold by 2027, while debt levels, which are due to stay put at 109.7% of GDP, should go down to 108.1% by 2027.

But this is far from being a given, according to the OECD, which also played down economic growth expectations for the country to 0.8% of GDP in 2024 before bumping back up to 1.2% in 2025. The government, on the other hand, is tabling 1.4% GDP growth in 2024 and 1.7% in 2025.

Boost potential growth

Bringing public debt and deficit levels down is a “categorical imperative” for French Economy Minister Bruno Le Maire, he said in September when introducing the budget bill – after years of employing a ‘whatever-it-takes’ budgetary approach to fight off the worst effects of both the pandemic and the inflationary crisis.

However, while cutting spending, EU member states are also in need of new fresh cash to finance the green transition and stick by the EU’s goal to cut greenhouse gas emissions by 55% come 2030.

“To hold their decarbonisation objectives, French businesses will need to invest €40 billion annually [up to 2030],” Patrick Martin, president of France’s largest business association Medef, told Euractiv in early November. Depending on calculations, figures vary between €40-60 billion annually for a clean green transition in France alone.

To the OECD meanwhile, the urgency is to boost “potential growth”: “Efforts to promote green alternatives to fossil fuels, housing renovation and energy savings should be strengthened,” the report reads.

Complete implementation of the National Recovery and Resilience Plan – a necessary tool to unlock Next Generation EU (NGEU) money – is also needed, the OECD argues, to “help to green the economy, aid the digital transformation, reduce administrative burdens, improve the coordination of public employment services, and revamp the health strategy at national and local levels”.

Of note, the infamous pensions reform, which had millions of French workers take to the street in the first few months of 2023 as the statutory retirement age was upped from 62 to 64, “will help to reduce future spending, but is not expected to balance the accounts of the pension system,” so the organisation claims.

Against European Council recommendations

The OECD’s dark light on France’s public finances goes hand in hand with the Commission’s European Semester opinion published last week, which hinted that the country may be subject to an Excessive Deficit Procedure come the spring.

The European Semester is a coordination tool the European Commission applies to monitor member states’ macroeconomic policymaking, and provides recommendations and fiscal guidance.

The opinion for France highlights excessive public spending and too-long a timetable to wind down emergency energy support entirely – which run against European Council recommendations for tighter fiscal policy.

Both the OECD report and the Commission’s opinion also come as member states are fighting over a reform of EU debt rules, that would look to give more leeway to invest in the green and digital twin transition. Debt reduction plans would be agreed on a country-by-country basis to respond to specific national needs.

A move by Germany to implement uniform numerical targets, which include minimum annual deficit reduction requirements, is however set to limit the impacts of the reform and possibly force countries to revert to austerity measures to meet public spending cut objectives.

Meanwhile, conversations are growing that a radically new approach is necessary in thinking about public spending and public debt. In an interview with Euractiv back in June, French economist Jézabel Couppey-Soubeyran called for alternative ways to finance unprofitable expenditures that are crucial to the green transition.

She suggested looking into the creation of a ‘Green Quantitative Easing’ tool, whereby the European Central Bank (ECB) would stand ready to buy out creditors that no longer believe a government is solvent – and as such, avoid risks of EU countries’ defaults.

In a more radical take, she also called on the ECB to “fuel money directly into ‘public financial institutions’, whose task it would be to direct the cash to public expenditures” that, though unprofitable, are necessary to the green transition.

[Edited by Nathalie Weatherald]

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