Are Michel Barnier's budgetary objectives achievable? A return to 3% in 2029?

Considering the forecast of a public deficit around 6% in 2024, the 3% target for 2027, which was still on the table a few months ago, has become completely unrealistic. Therefore, postponing the target to 2029 is more credible. Such a delay is compatible with the new version of the stability pact that frames the fiscal policies of eurozone countries. I would add an important point: spreading out the required adjustments over time helps limit the short-term negative impact on activity and employment from raising taxes and cutting certain public expenditures. In the longer term, reducing the public deficit (state, local authorities, and social security) will be positive for domestic and international confidence in France's credibility, investment, activity, and employment.

That said, spreading out the adjustments, thus "buying time," especially with respect to our European partners, does not make the financial exercise easier, nor socially and politically comfortable.

What about economic growth?

We cannot rely on growth to close the gap by boosting tax revenues and reducing certain expenditures: given the multiple geopolitical shocks, the Chinese slowdown, and the stagnation in Germany, there is no miracle to expect from this side. The government is right to assume a GDP growth rate of 1.1% for 2025, similar to that of 2024. Since it would be foolish to count on a significant acceleration in growth to get us back on track, the cost to be paid will be substantial on both sides—tax revenues and public expenditures. I noted that the surtax on the "rich" and on large companies is presented as "exceptional" (for "one to two years"). However, I remain cautious about this. It took us years to bring the corporate tax down from 33% to 25%, a rate that still places us above Germany and the European average. Now, for large companies, we are moving in the opposite direction, back to over 33%. Will we be as slow as in the past to return to 25%?

What about public expenditures?

On the public expenditure side, the equation is even more complex. It assumes achieving what we have failed to do for decades, despite numerous initiatives and commissions on the subject. Many projects and fine words, but not many results. I’m not the one saying it—the numbers do: France leads in public expenditure relative to GDP (around 56%), and today, we no longer have the excuse of a Scandinavian country above us; they are all now below.

What risks does France face with the excessive deficit procedure initiated by the European Commission?

France has indeed been in the excessive deficit procedure since this summer, along with six other EU countries. Given the time required to get back on track with the public deficit (it will take even longer for public debt!), we are far from emerging from this. Should we fear the wrath of Brussels and our European partners? On paper, yes. In practice, a little less, for several reasons. First, since the introduction of the euro, many member countries have slipped on deficits, debt, or both. France, Italy, Portugal, Belgium... and even, on some occasions, Germany. In practice, the financial sanctions organized by the stability pact have never been applied, undermining the system's credibility. The new version of the stability pact does not change this, as the system of financial sanctions, which worsens the financial situation of already fragile countries, remains in place. Additionally, Germany's current weakness likely makes our German friends less inclined to attack their main partners for slipping on public finances.

In the short term, France should fear the judgment of international investors and rating agencies more than the bluster from Brussels. The long-term interest rate spread with Germany has almost doubled since the dissolution of the National Assembly. At 10 years, the French state borrows at a rate comparable to Spain, not far from Greece. With foreign investors holding 40% of our public debt, everything must be done to avoid a sharp widening of the French spread. This could result from a downgrade of France’s credit rating by major agencies, a political crisis in the already complicated context, etc. Hence the need for the public finances adjustment program to be credible in the eyes of financial markets and rating agencies.

Can too many budget cuts negatively affect growth and employment in France in the coming months?

We must not destroy what remains of growth. We need to reduce deficits and debt by tightening fiscal and budgetary policies without excessively weighing down activity and employment through the recessionary impact. It's all about timing and dosage. The balance is very tricky between too much and too little, so the approach must be resolutely pragmatic. We know from experience that overly restrictive fiscal policies, by excessively weighing on the economy, reduce tax revenues (VAT, corporate tax, income tax...) and inflate certain expenditures (unemployment benefits, social assistance...), thus worsening the public deficit instead of reducing it.

In this difficult context, there is nonetheless an advantage from the evolution of monetary policy. Disinflation, that is, the decline in inflation rates, has begun in many places, including France and Europe. If it is not interrupted by an oil shock caused by events in the Middle East, it will allow central banks to continue the already initiated movement of lowering their key interest rates. What matters for the economy is not fiscal and budgetary policy taken in isolation, but the combination of monetary and fiscal policies. From this perspective, the recessionary effects of budgetary adjustments could, at least in part, be "offset" by the effects of gradually eased monetary policy. Such a monetary-budget combination should prevail in 2025, and perhaps even in 2026, depending on inflation and central bank behavior. By 2027-2029, budgetary adjustments will still be required in France, but we cannot predict with certainty the ECB's policy.

Former Budget Minister Éric Woerth estimates the budgetary effort at 120 billion over the next four years. Is this feasible without a major tax reform?

These figures are credible estimates. Despite the difficult political context, 2025 will have to bear a larger share of the adjustment to set the trajectory we seek. Although taxes will be part of the solution, controlling public expenditures will be the main focus. A major tax reform could help, but we might be waiting for it as one waits for Godot... with no clear direction at this point. The control of public spending has been an open issue for more than twenty years, producing good intentions rather than actions. The exercise is undoubtedly socially and politically complicated, as there are likely to be far more losers than winners. Three conditions are necessary to advance on this front: 1) a strong political will; 2) a method to assess the absolute and relative effectiveness of public and social expenditures; 3) the necessary coordination between the three layers involved (state, local authorities, social security), where mutual distrust currently prevails.

Let's move forward pragmatically on these points. Many other countries have done it. We are now at the foot of the wall.

(*) Christian de Boissieu is Emeritus Professor at the University of Paris I (Panthéon-Sorbonne), Vice-President of the Circle of Economists, and former President of the Economic Analysis Council under the Prime Minister.