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Larger-than-expected reduction in French public deficit

Summary:
The deficit declined below 3% for the first time in a decade, which should boost France’s credibility with its neighbours.France’s public deficit fell to 2.6% of GDP in 2017 according to INSEE’s preliminary assessment, down from 3.4% in 2016 and below the 3% threshold for the first time since 2007. The outcome was better than the government’s estimate of a 2.9% deficit. If confirmed, France will exit the Excessive Deficit Procedure that the European Commission opened in 2009.France’s budget balance ended up about EUR10bn above the level initially projected by the government, which helped offset a slippage in expenditures as well as a EUR10bn increase in one-off transfers due to the partial refund of the 3% tax on dividends that was ruled unconstitutional, and a EUR2.3bn capital injection

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The deficit declined below 3% for the first time in a decade, which should boost France’s credibility with its neighbours.

Larger-than-expected reduction in French public deficit

France’s public deficit fell to 2.6% of GDP in 2017 according to INSEE’s preliminary assessment, down from 3.4% in 2016 and below the 3% threshold for the first time since 2007. The outcome was better than the government’s estimate of a 2.9% deficit. If confirmed, France will exit the Excessive Deficit Procedure that the European Commission opened in 2009.

France’s budget balance ended up about EUR10bn above the level initially projected by the government, which helped offset a slippage in expenditures as well as a EUR10bn increase in one-off transfers due to the partial refund of the 3% tax on dividends that was ruled unconstitutional, and a EUR2.3bn capital injection into Areva. On the revenue side, stronger economic growth (+2.0% in 2017 versus 1.7% expected) translated into a 4% increase in fiscal receipts, including a one-off contribution from corporate income tax. Of note, social security funds recorded a net lending for the first time since 2008.

Despite this strong performance, France will likely remain under European Commission pressure to do more. In structural terms, the planned reduction in the 2018 deficit has been deemed insufficient by Brussels, and additional corrective measures could be required eventually. Meanwhile France’s compulsory fiscal levies ratio rose to a record high of 45.4% of GDP. The public debt ratio increased to 97% of GDP in 2017, another all-time high.

Fiscal consolidation is a marathon, not a sprint, and should be seen in the light of broader structural reforms aimed at boosting growth potential. For France, it is a matter of rebuilding credibility with its European partners at this particular juncture. The structural reforms implemented in the past year have been welcomed by Brussels and Berlin. Pourvu que ça dure.

Frederik Ducrozet
Mr. Frederik Ducrozet is a Senior Econoist at Banque Pictet & Cie SA, Research Division. Prior to this, he served as Senior Eurozone Economist at Credit Agricole Corporate and Investment Bank, Research Division from June 2006 till September 2015. He joined Crédit Agricole SA in 2005. Mr. Ducrozet contributed to the various publications of the research department, with a special focus on macroeconomic developments in Eurozone countries, including on the outlook for fiscal policy and the ECB’s monetary policy. Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

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