France faces a very difficult fiscal policy choice

If no corrective measure is taken in France, the reduction in a large number of taxes and the increase in several public spending items is probably going to lead to a fiscal deficit far in excess of 4% of GDP in 2022. The French government must therefore make a very difficult choice: Either to let the fiscal deficit rise without reacting. This would be unlikely to lead to problems in terms of financing or interest rates, but could pose a problem politically by weakening France’s influence in Europe; Or to correct the fiscal deficit and reduce it to the 2022 target level (0.5% of GDP), which would require a highly restrictive fiscal policy involving reductions in the fiscal deficit of 1 percentage point of GDP per year and resulting in very weak growth (significantly lower than 1% per year). This is a very difficult choice to make, as both strategies have major drawbacks. The only hope is if: The reforms have a rapid positive effect on France’s potential growth; Or public spending can be reduced in such a way that stimulates private spending (by giving rise to “Ricardian neutrality”) .