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France’s fiscal plan to repair slower than peers 

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Economic growth assumptions in France’s 2022-2027 Stability Programme are potentially out of reach, while fiscal targets are unambitious and  public finances appear once again set to repair slower than peers, according to a leading rating agency.

DBRS Morningstar said in a commentary that under France’s medium-term plan – delayed due to elections – the deficit does not fall below 3% of GDP until 2027, and the government debt ratio stabilises at a high level and does not revert to a downward path.

France followed a similar pattern of comparatively slow fiscal consolidation after the financial crisis a decade ago. Most other Euro area countries are repairing fiscal imbalances much faster and returning debt ratios back to pre-crisis levels and trends.

Slow budget repair does not affect France’s strong debt profile, although it limits the country’s spending space to address structural challenges or to accommodate another shock, the rating agency said.

“The relatively optimistic assumptions in the fiscal plan are in part tied to passage of key reforms. Those reform ambitions will likely be challenged by the new make-up of the legislature following the recent parliamentary election,” said Jason Graffam, Vice President of the Sovereign Group at DBRS Morningstar.

“Underperformance of growth expectations would likely keep deficits in France higher for longer, while public balance sheets across Europe rebalance faster.”

Growth assumptions ‘ambitious’

The government expects the French economy to expand by 2.5% in 2022, and by 1.4% in 2023. For the French economy to perform in line with these projections, the stability programme assumes annual average inflation of 5.0% in 2022 and 3.2% next year, declining as interest rates rise and energy costs decline.

These price assumptions are uncertain and will be determined by the progression of energy and food prices as a result of Russia’s invasion of Ukraine, the smoothing of global supply-chains, and wage dynamics in the French economy, DBRS Morningstar said.

The consumer price index expanded at an average annual rate of 6.4% according to the last three months of available data.

The government’s growth assumptions confront multiple downside risks, the rating agency added.

The IMF in its July 2022 WEO update was less optimistic than the SP. It expects the French economy to grow by 2.3% this year and by 1.0% next year.

Rexecode, a French institute for economic studies, expects the economy to grow by just 0.3% in 2023. The wide variation of forecasts is linked to high uncertainty around inflation, the decline in consumer and business sentiment, and rising interest rates and tightening financing conditions.

Risk is amplified by doubts around the gas supply for energy consumption to Europe this winter. From 2024-2027, the government assumes growth will average 1.7%, above trend growth of 1.4% recorded from 2010 to 2019.

Strong growth, according to the government, will also result from an increase in the labour supply due to the passage of key reforms to pensions, unemployment insurance, the minimum income scheme, and public childcare.

DBRS Morningstar concluded that the details are not yet clear, and the new make-up of the legislature following the recent parliamentary election challenges those ambitions.

After winning presidential re-election in April 2022, President Macron lost the outright majority in the legislative election in June. The emboldened opposition will likely frustrate the government’s reform agenda.