France: Structural difficulties in reducing the fiscal deficit in the medium term

The French government’s average GDP growth forecast for the period 2024-2027 was 1.6%. Following the revision of the growth forecast for 2024 from 1.4% to 1.0%, this expected average growth was reduced to 1.5%. But in all likelihood, since the decline in productivity is essentially due to structural causes, the lack of productivity gains will be long-lasting. If productivity in France remains stagnant over the long term, it is hard to believe that growth between 2024 and 2027 will exceed 0.8% per year, which corresponds to the average annual growth in the employment rate over the period 2018-2023. If France's GDP growth is only 0.8% per year instead of 1.6% per year, the shortfall in the level of GDP at the end of 2027 will be 3.2 percentage points, and the fiscal deficit will be around 4.3% of GDP instead of 2.7% of GDP, as forecast in the medium-term budget forecasts. If, despite weak growth, the French government wants to reduce the fiscal deficit to 2.7% of GDP by 2027, if it reduces public spending accordingly, if the fiscal multiplier (ratio between the change in public spending and the change in GDP) is 1, and if a 1 percentage point fall in GDP leads to an increase in the fiscal deficit of 0.5 percentage point of GDP, maintaining the fiscal deficit at 2.7% of GDP (when it would spontaneously rise to 4.3% of GDP) would require a cumulative reduction in public spending of 0.8 percentage point per year. Ex post , this would result in zero GDP growth between 2024 and 2027.