January 24, 2022

Presidential: the great budgetary challenge awaiting the next head of state

Posted Jan 14, 2022, 6:30 AMUpdated on Jan 14, 2022 at 4:49 PM

Weaning from “whatever the cost” promises to be painful. If the next President of the Republic wants to put the public accounts back on the path to a certain budgetary normality after the health crisis, his popularity rating could quickly suffer. Bringing the public deficit back below 3% of GDP and stabilizing the debt by 2027 would indeed require a savings program of 70 billion euros over the next five-year period. An effort never seen before.

This is what emerges from a study carried out by the Institut Montaigne, which will analyze with “Les Echos” the programs of the candidates for the presidential election during the coming weeks. “Our objective is to lift the veil on the situation of public finances, which is particularly worrying, to avoid an electoral campaign which would only talk about new spending or tax cuts”, underlines François Ecalle, author with Vianney Bourquard of the note of this liberal think-tank and host of the site specializing in public finance “Fipeco”.

Upward pressure on spending

To reach this conclusion, the Institut Montaigne sought to draw the path that public spending could take in the years to come . However, for the authors of the note, these “should be subject to upward pressure compared to the past decade” due to “many new needs that have arisen”: this affects both the investments necessary for the ecological transition as the need to strengthen public services (notably the hospital), through the means allocated to defense or security.

“The freezing of the point of index of the civil servants, operated since the beginning of the years 2010, is not tenable either eternally”, judge François Ecalle.

What inflate the bill of public expenditure. Between 2010 and 2019, these increased by an average of 27 billion euros per year. But for the next five years, the think-tank’s scenario would rather be a trend growth – if no new measures were taken – of 41 billion per year. A phenomenon also largely fueled by the foreseeable inflation of the sums allocated to retirement pensions and reimbursements from health insurance.

This makes the march for deficit reduction much higher than in the recent past. With such a trend, the deficit would painfully fall to 5% of GDP in 2027 (against less than 8% expected for 2021) and the debt would climb to 120% of GDP (113.5% expected at the end of 2022). In any case, a long way from the target of 3% by this time to begin reducing debt, promised by the executive last spring.

Ways to save

To meet this objective, the Institut Montaigne considers that “a particularly complex savings program to put in place” would be needed: 15 billion in savings per year would be necessary, i.e. 70 billion in total over the five-year period, which does not has never been done before. “An unprecedented amount”, agrees the note.

How to achieve it? The Institut Montaigne gives the orders of magnitude of a few possible emblematic measures while agreeing that “some of these measures, in the current context, are neither desirable nor realistic”. “The pension reform is the minimum to do,” judge François Ecalle. Pushing back the retirement age by two years and six months would yield 17 billion over five years, the same amount as deindexing pensions for three years.

Pessimism about goals

Another avenue mentioned, a moderation of the increase in health insurance expenditure limited to 2.5% per year “by improving the productivity of the health system (fewer unnecessary acts, better coordination between city medicine and hospitals, etc. ) or by increasing the contribution of households to the financing of health services (with a health shield for the most modest)”, according to François Ecalle. Enough to bring in another 15 billion.

The other avenues are of lesser magnitude, such as the 0.7% reduction in State staff (3 billion) or the reduction in expenditure allocated to sports, leisure and culture at the average level of the euro zone (7 billion).

“The return below 3% of the deficit seems very difficult to me, agrees François Ecalle. I am quite pessimistic about the ability to make such a savings program acceptable to the population. But such a constraint should, at the very least, encourage candidates to limit costly promises…