The consequences of supporting purchasing power: The example of France

All European countries have taken measures to support purchasing power in the face of rising commodity (energy, food) prices . This has been the case in particular in France , where energy prices have been capped . This explains why inflation is markedly lower in France than in other countries. We examine the consequences of strong support for household purchasing power through public transfer payments, drawing on the conspicuous example of France. Our analysis focuses on the elasticity of imports to domestic demand. If this elasticity is high, like in France, then lasting public transfer payments to households (reflecting the likely lasting nature of the rise in commodity prices) will: Of course lead to an additional fiscal deficit; But also lead to a slight increase in production, a sharp increase in imports and a sharp deterioration in foreign trade; Resulting in additional public debt, which will primarily be external debt. In the case of France, 62% of the public transfer payments have gone into the external deficit. When the elasticity of imports to domestic demand is high, this policy therefore amounts to financing additional consumption through external borrowing, which is clearly not recommended (as opposed to external borrowing to finance productive investment). Moreover, this additional consumption is largely imported, so it has no positive effect, even in the short term. Such a policy should at least be targeted at lowe r -income households in order to reduce the amount of debt (public and external) it generates .