2024-09-26 15:35:35
This is the elephant in the room. As the budget debate opens in Parliament, the question of reducing public debt is at the heart of current issues. While there are several ways to achieve this result, not all of them have the same impact on employment and growth. It is better to promote measures in favor of work than to increase taxes.
During the last Finance Law passed in 2023, the then government committed to closing its 2024 budget with a deficit equivalent to 4.4% of GDP. In this context, the Cepremap study 2024-02 indicated that a reduction in net spending of 20 billion euros per year would be necessary to stop the rise in French state debt, which began in the early 1980s, and then reduce it.
Such a change in the dynamics of public debt made it possible to attest that it remains under control and therefore sustainable, because it could thus benefit from low interest rates.
Ultimately, the 2024 budget deficit will be close to 6%. As the debt increases again and again, the credibility of the French state’s debt repayment capacity is reduced. This increase in default risk can be seen on the markets: while the French State could borrow in 2021 at a rate 0.5 points lower than that prevailing for Portugal, it now owes a higher rate of 0.15 points). With this increase in the deficit, if the French State wishes to restore its credibility and therefore contain the increase in the interest burden on its debt, it is no longer 20 billion euros per year that must be found, but rather 30 billion per year.
A new budgetary trajectory
The new government must therefore define a budgetary trajectory defining how to save the first 20 billion annually, which the old government should have done, but also determine how to make this additional budgetary effort. Obviously, the best strategy for restoring a country’s finances consists of promoting measures that encourage activity and therefore ultimately state revenues, particularly work. This is what theCepremap study the principles of which are taken up here, but applied to the new budgetary reality of France.
With the objective of reducing the debt-to-GDP ratio by 5 points by 2027 without hindering growth or increasing inequalities, the Cepremap model indicates that the reduction of billions annually in net expenditure must result from a reduction in transfers indexed to income (retirement and unemployment insurance) of 50 billion per year partially offset by an increase in transfers not indexed to income (health, poverty, etc.) of 20 billion per year. Of course, if the objective is “only” to reduce the debt-to-GDP ratio by 2 points by 2027, a reduction of 24 billion euros per year is necessary if it results from a drop in transfers. indexed on income of 43 billion per year partially offset by an increase in transfers not indexed on income of 19 billion euros per year.
Restoring intergenerational equity
This strategy would boost GDP because it would lead to an increase in hours worked and consumption demand of the most disadvantaged. It has a political blow, that of refusing the non-indexation of pensions for several years. However, as the monthly disposable income per head of retirees was, in 2019, 2,132 euros, compared to 2,099 for active people (see COR (2023)) and that their savings rate for people aged over 70 is 26% compared to 10% for those aged 40-49 (see INSEE (2020)), this policy would help restore intergenerational equity.
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As the contributions paid only cover 80% of retirement expenses (see Beaufret (2023)), reducing pensions would amount to reducing the various current transfers from the State to retirees, and not to taking away “rights” which have, in fact, not been completely “acquired”. Finally, while the average retirement age is 63 in France, it is 65 in Germany: raising the retirement age by two years represents a saving of 22 billion euros per year for finances. public, knowing that current and past pension fund deficits explain half of the increase in public debt, as shown Jean-Pascal Beaufret. In contrast to the demands for repeal of the last pension reform, it would rather be necessary to prepare for the next one so that it allows a real rebalancing of public finances.
Threats to growth
Faced with a potential political difficulty which nevertheless only consists of restoring part of the value of work, an increase in certain taxes has been considered, by some such as, for example, the governor of the Bank of France. The burden of budgetary adjustment would then no longer rest solely on those who do not or no longer work, but also on those who are active.
But, if the government increases its revenue by 5 billion per year via an increase in taxes, this mechanically allows it to reduce its spending less. This risks also reducing the GDP growth rate by reducing job creation. Indeed, increasing compulsory contributions without disincentivizing entrepreneurs to participate in wealth creation and without excluding the most vulnerable workers is almost impossible.
“Tax justice”, i.e. a better distribution of greater wealth, must not be achieved through an increase in taxation but through a rebalancing of transfers in favor of those who are not indexed to income, as shown by the study of Cepremap. Not increasing the tax burden is not a “dogma”, but a recommendation based on public policy evaluations which show that a policy aimed at reducing debt without hindering growth or increasing inequalities must be based on measures revaluing work, therefore promoting economic activity… and ultimately making it possible to increase State revenue through growth.
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