FREE

France 2022 Budget: Cyclical Improvement But Structural Challenges Remain

DBRS Morningstar comments on yesterday's publication by the French government of its 2022 Budget Law. France (rated AA (high), Stable) should see its fiscal performance improve markedly in 2022 compared to 2021, supported by the strong economic recovery initiated in 2021 and the scheduled wind down of the government's exceptional support measures. France's 2022 deficit is expected to decrease to 4.8% of the country's gross domestic product (GDP) down from 8.4% of GDP this year.

While this decrease is significant, DBRS Morningstar considers the adjustment mostly cyclical and primarily reflecting both the economic rebound as well as the partial lifting of targeted crisis support measures. With presidential elections scheduled in April 2022, tackling structural imbalances represents a key medium-term challenge for France's government. Structural reforms are likely to be needed to restore the country's fiscal position and to decrease its high debt-to-GDP ratio. Key reforms might nevertheless be met, as in the past, by social protests which could curtail the government's ability to implement them. The future government commitment and resolve, particularly at the onset of its mandate, will be key to deliver on such reforms going forward.

Key highlights include:
• The budgeted improvement of the 2022 deficit figure is positive, but it appears largely driven by cyclical factors.
• Some expenses implemented during the COVID-19 pandemic are likely to become structural, weighing on France's medium-term fiscal balance.
• Reforms to tackle France's high structural deficit are likely to be needed to restore the country's fiscal position and to lower its high debt-to-GDP ratio.
• Presidential and legislative elections in the first half of next year imply the task of tackling structural reform will fall to the new administration.
• Implementing reforms while avoiding social unrest movements like the one experienced at the end of 2018 and the beginning of 2019 with the "yellow vest" will make the task all the more demanding for the future government.

”Going forward, resolving the equation of delivering key structural reforms that would allow the government to restore France's fiscal accounts and place the country's high debt on a firm downward trend, while avoiding social unrest, appears as one of the key challenges for the future government,” notes Nicolas Fintzel, Senior Vice President in the Global Sovereign Ratings Group.