The year 2018 might also be a turning point for the public debt ratio. According to preliminary INSEE estimates, the debt ratio levelled off at 98.4% of GDP. Although the ratio has not declined yet, at least it has not increased either, for the first time since 2007. Better yet, a decline is foreseeable in 2019 and 2020. Based on our forecasts for interest rates (about unchanged in both years), nominal growth (3% and 2.7%, respectively) and the primary deficit (-1.4% and -0.2% as a percentage of GDP, respectively), the public debt ratio would decline by about 1 point in 2019 and by nearly 2 points in 2020[3]. Of course, these are only estimates and cannot be taken for granted. Nonetheless, there is a high probability that the debt ratio will decline given the efforts already made to reduce the primary deficit, combined with the very low level of interest rates, which are much lower than the nominal growth rate[4].
The 2019 deficit will be above but close to 3%
The expected temporary slippage of the fiscal deficit above the 3% threshold in 2019 should remain contained thanks to the better-than-expected performance in 2018. This overrun can be attributed to two distinct factors:
1/ First, the fiscal cost of transforming the CICE tax credit into lower charges, which is estimated at about 1 point of 2/ Thereafter, the fiscal cost of the plan to boost the purchasing power of low-income households, which was announced on 10 December 2018 in response to the Yellow Vest movement. The cost of this package amounts to nearly EUR 11 bn, or 0.5 points of GDP, which drives the deficit above the 3% threshold in 2019.
Determined to limit the slippage as much as possible, however, the government worked on finding and generating nearly EUR 4 bn in financing measures. According to the 2019 finance bill passed on 28 December 2018, the new government’s deficit target for 2019 is 3.2% of GDP. At the same time, the 2018 deficit target was also revised upwards to 2.7%. These new deficit targets are based on the same growth assumptions as in the 2019 draft budget bill (1.7% in 2018 and 2019), but with the structural adjustment reduced to zero in both years, compared to 0.1 and 0.3 points previously.
These assumptions (2018 deficit of 2.7%, no structural adjustment in 2019), combined with our significantly lower growth forecast for 2019 (1.2%), brought our estimate of the 2019 deficit to 3.4%. The better-than-expected results for 2018 automatically lowers this deficit forecast to 3.2%[5].
The government is also exploring the idea of revising its deficit target for 2019. Any revision is bound to be limited, however, since the positive impact of the better 2018 figure will be offset by the negative impact of the inevitable downward revision of the government’s 2019 growth forecast. According to recent statements by Bruno Le Maire, Minister of the Economy and Finance, this new growth forecast should be around 1.4%. Based on this figure, and assuming the government maintains its scenario of no structural adjustments, we estimate the government’s new 2019 deficit target at 3.1%.
Of course, this forecast is sensitive to its underlying assumptions. The table below illustrates this point by showing how much the deficit moves above or below the 3% threshold depending on the real growth rate and structural adjustment assumptions used. This exercise is limited, however, by the fact that it is based on an “unchanged debt servicing charge”. Yet this variable is unlikely to change much this year and should have only a minor impact. To complete the picture, we have nonetheless included an additional line showing the variation in the deficit based on different debt servicing assumptions (centred on our central scenario of 1.82% of GDP, with intervals of 0.02, which is the (negative) variation observed between 2017 and 2018), using a scenario of 1.4% growth and no structural adjustment. From this table we can also gleam a rather positive message: although the scenario of a deficit holding at or slightly below 3% in 2019 is still not very likely, it nonetheless becomes again a real possibility.
The government might also decide to maintain its deficit target at 3.2%[6] in order to finance the new stimulus measures that are likely to arise in response to the Great National Debate. According to our calculations, based on the government’s relatively optimistic growth forecast (1.4%), new stimulus measures could amount to a maximum of EUR 5 bn. This figure could be lifted, however, if new fiscal consolidation measures are also adopted, which seems likely. We should know the verdict, or at least a few key elements, within the next 10 days or so, when France submits its new Stability Programme to the European Commission, scheduled for 10 April, while the first conclusions of the Great Debate are expected in mid-April.
France: deficit scenarios
