After recording sizeable fiscal deficits during the Covid period, EU members have committed to bringing it down to below 3% of GDP in the medium term. Germany even goes further.
Yet, while the average public debt of the eurozone reaches now 89% of GDP, public debt remains close the 60% threshold in Germany. Its debt brake, restored from 2024, assumes that the federal government’s structural deficit does not exceed 0.35% of GDP.
Economic literature has shown that when public debt is moderate, fiscal consolidation can weigh on growth. Moreover, one of the main conclusions of the Pisani-Ferry/Mahfouz report stresses that the implementation of the energy transition by the private sector requires dedicated budgetary support.
In Germany, however, budgetary support for the purchase of electric vehicles was withdrawn in December 2023 in order to reduce the fiscal deficit, weighing on total car production now about 20% below its end-2017 peak. Indeed, Germany has been experiencing GDP stagnation for two years.
On the other hand, when public debt is perceived as high, households and businesses may increase their savings, expecting today’s deficits to become tomorrow’s taxes.
In this case, the literature shows that fiscal consolidation made through lower spending could even support growth. Indeed, if confidence in the trajectory of public debt is restored, fear of future taxes would diminish, easing debt stabilization.
Is France in this situation today? First, the perception of excessive public debt has matured in public opinion. According to the Montaigne Institute’s barometer, 39% of French people consider its reduction to be very urgent (+15 pp in one year).
A method that prioritizes spending cuts rather than tax increases has been little tried in the past, and in particular not in 2012-13 when government revenues were increased by 1 pp of GDP per year.
Today, with sluggish consumption and deteriorating corporate margins, there is low leeway in terms of taxation. So could fiscal consolidation based on targeted lower public spending become expansionary in France? We think so, but the future will give an answer.
