2024-10-11 13:10:00
Prime Minister Michel Barnier presented the finance bill for 2025 on Thursday October 10. 60 billion in savings are expected, via tax increases and spending reductions. Mathieu Plane, deputy director of the analysis and forecasting department of the French Observatory of Economic Conditions (OFCE), deciphers the challenges of this exceptional budget, by its context and its scale.
The 2025 budget presented on October 10 by the Prime Minister sets out the ambition to go from a public deficit of 6.1% to 5% of GDP. What in the current economic situation justifies it?
The main point is the sharp deterioration of public accounts observed in recent months and which is completely unprecedented. The forecast error is historic, since the gap is 1.7 points of GDP between the finance law taken at the end of 2023 and the current one! This gap represents more than 50 billion euros, roughly the budgetary effort requested for next year. This gigantic budget forecast error is all the more disturbing given that growth has not been revised downward in the meantime.
At the same time and in connection with this bad budgetary news, but also the political crisis following the dissolution, the risk premium on France’s debt has increased in recent months. By risk premium, we designate the difference in the interest rate to be paid on French public debt compared to that of Germany. France therefore finds itself in a much less comfortable situation than it was a few months ago with regard to foreign investors and lenders.
Because, even by carrying out the budgetary efforts planned for 2025, France should find itself at the bottom of the European Union countries in terms of deficit. It’s also something new, France has been pretty average so far. To put it another way, the current budgetary crisis is more French than European. The last crisis we experienced of this type was at the turn of the 2010s, where the bad performers were clearly the countries of Southern Europe. Today, Italy aside, this is no longer the case and worried eyes are now turning much more towards France.
The budget is a financial act, but also a political one. What does the budget say about the directions taken by the Barnier government?
It is certainly a political act, but in a very particular political context and of unprecedented urgency. Preparing the budget was a balancing act for this new government, in a very short time, where it was necessary to reassure France’s European partners, reassure investors and find a way through so that it could be adopted by the current national assembly. This is not the standard situation in which one develops a budget.
Having said this, the choices made by the government reveal a shift in tax policy. It is announced as temporary, but it could well last as long as France has not returned below the 3% mark. There is a choice of targeting the largest companies and the wealthiest households. The announced increases concern the 0.2% of tax households with the highest incomes, and companies with a turnover of more than 1 billion. Add to this the measures on EDF or on shipowners. On the other hand, other companies could be more affected by the reduction in exemptions from employer contributions.
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It is a questioning, at least temporarily, on its fiscal aspect, of the supply policy which has been pursued for several years. In addition, the flat tax on financial income is maintained in this budget, but with the establishment of a minimum tax rate on the highest incomes, this implicitly amounts to increasing the taxation of income on assets without saying directly that we touched the flat tax.
Is this a left-wing tax policy?
A left-wing government could have had a fairly similar tax policy. But this is only part of the actions planned. The reduction in spending part will affect all businesses, even the smallest, or all households, including the middle classes and the most modest. This type of measure is much less targeted. For example, the six-month postponement of the increase in retirement pensions should affect all retirees regardless of the amount paid. The same goes for reducing health spending or recalibrating ecological aid.
On the business side, the refocusing of expenditure linked to apprenticeship also concerns SMEs, in the same way, a priori, as everything that is announced in terms of review of aid.
The debate has largely focused and continues to focus on the trade-off between lower spending or higher taxes? Is this distinction scientifically based? If I take the example of lower reimbursement of medical expenses, this will increase mutual insurance and reduce household income. It’s not a tax increase, but the result is close enough?
In economics, communicating vessel effects are often observed. If I take your example again, the reduction in public coverage of health expenditure makes it possible to limit the increase in public health expenditure, and this is what is sought. But a disengagement from Social Security, even limited, can have the effect of an increase in private withdrawals if the reimbursement burden is transferred to supplementary funds. More generally, the debate between increasing taxes or reducing spending is not very well founded from an economic point of view. It’s more of a political debate. The line between the two is quite blurry when we delve into the subject beyond the slogans. For example, exemptions from contributions paid by companies are offset, so this is considered a reduction in spending. For the company which will no longer benefit from it, it will above all be an increase in deductions!
It is more interesting to study who will be affected by the measures: which households? which companies whether it is raising taxes or cutting spending. There can be real differences there.
Is the same true for the distinction between state expenditure and that of local authorities?
This distinction has real relevance because we are not talking about the same skills. The central State takes care of government matters, national education, the economy and finances. In terms of staff, three quarters of the state civil service are in state ministries or in national education.
The problem of local authorities is that they have lost budgetary autonomy, with the abolition of the housing tax, whereas they must fulfill a certain number of missions and respect strict budgetary rules, such as the impossibility of ‘have a budget deficit excluding investment. The State does not really have control over what communities do, apart from voting on the grants it pays them, most often to compensate for cuts in resources, such as the end of the housing tax. Communities therefore take a very dim view of the choices imposed by the State.
In this budget we have the impression that the choice was made to reduce almost everywhere. Would it not have been better to define priorities (for example the future, by focusing on training, ecological transition or investment in favor of competitiveness) rather than giving a general plan?
There is undoubtedly a “fundamentals” side to this budget. It is difficult to see a long-term strategy on innovation, ecological transition or a vision for schools when we are asking to do more with less. Added to this is the fact that many measures are presented as exceptional, short-term. There is clearly a lack of a global and long-term vision. But we must not forget that this budget was finalized in a few days. A long-term policy cannot be decided so quickly, because it requires long reflection, a detailed diagnosis and a strategy. Michel Barnier is more in the position of a firefighter trying to put out a fire. If it is difficult to see the overall economic logic, it is because the priority is first and foremost budgetary.
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