The scale of France’s fiscal problem

We begin with the following findings: The real long-term interest rate in France is close to potential growth, which means that to stabilise the public debt ratio in the long term, the primary fiscal deficit must be eliminated. The primary public fiscal expected in 2024 is 3% of GDP; If there is no Ricardian neutrality, i.e. if the savings rate does not react to a reduction in the fiscal deficit, a 1 percentage point reduction in the fiscal deficit (obtained by public spending cuts or an increase in the tax burden) ex ante reduces the fiscal deficit ex post (after taking into account the effects of the reduction in the deficit on activity) by only around 0.5 pp of GDP. Reducing the primary fiscal deficit from 3% of GDP to 0% of GDP therefore requires a reduction in public spending or an increase in the tax burden of 6 pp of GDP; The required fiscal adjustment is therefore considerable. If inflation is 2%, this corresponds to a freeze on all public spending in nominal terms for almost six years.