In France, people often speak—often lightly—about reducing public debt. No one truly grasps how necessary this is or how difficult it will be.
If nothing is done, the public debt—which stands at 117.6% of GDP—will continue to rise and will quickly become unsustainable, due to the dual burden of the primary deficit (that is, excluding debt service, caused by the natural increase in public spending as a proportion of GDP, especially during periods of low growth) and debt service (which will increase as low-interest loans must be replaced by new loans at rates that will be all the higher because the markets will charge us a risk premium precisely due to our rising debt).
If those who finance us ever conclude that we are no longer able to repay their loans, they will stop financing us, and the government will no longer be able to pay for investments, wages, social benefits, and pensions.
Reducing public debt is therefore essential to France’s survival in a world that will give us no breaks…
Let’s take stock of the wall looming before us:
Given current interest rates, we cannot expect any relief from debt service, which will naturally increase. Nor can we expect relief from increased revenue, which is already at the highest level among OECD countries, even if we could adjust its distribution (for example, through wealth taxes that, for constitutional reasons, can only be symbolic).
Any reduction in public debt can therefore only come from spending cuts. Let’s get down to specifics:
If we want to reduce public debt to 100% in ten years (which is the minimum required to be credible), a rough calculation shows that we would need to make a very significant effort to cut spending (5.5% of GDP) for four years and then keep spending from rising for six years—something no French government has done since the 1970s.
Public debt would then fall from about 117% of GDP in 2027 to 116% in 2029, 111% in 2031, 104% in 2034, and 99.5% in 2036. And even this calculation is based on the very optimistic assumption of nominal growth of at least 2.75% per year.
In other words, drastic action would be required at the outset. The first three years would serve only to reverse the trend; public debt would not truly begin to decline until the fourth year of these efforts. A balanced budget would then need to be maintained for six years to reduce the debt to 100% after ten years.
Where can such savings be found? Let’s recognize just how drastic the necessary measures are:
We would need to both implement a two-year delay in the effective retirement age—which would yield 0.6 to 1.4 percentage points—combined with under-indexing pensions for five years, which would yield approximately 0.65 percentage points; at the same time, public spending in absolute terms must not increase for five years; to achieve this, we must drastically reduce business subsidies and contribution relief, rein in the natural upward trends in healthcare and local government budgets, and stabilize the total public payroll and that of state-owned entities at current levels.
And this effort would need to be sustained over two five-year terms. To achieve this, it would be necessary to formally pass a binding budgetary programming law, committing to not increase the volume of public spending for ten years (which does not preclude stepping up efforts on new priorities such as defense), beyond the “multi-year net expenditure trajectory” that the European excessive deficit procedure already imposes on France—a trajectory that has so far failed to slow the upward trend.
And even that would not be enough: it would have to be supplemented by massive divestitures of the government’s stakes in publicly traded companies and—the absolute horror—the partial drawdown of public cash reserves.
All of this ultimately depends on growth materializing and global interest rates not rising.
The Belgian precedent shows that it is possible: there, debt fell from a peak of 134% of GDP in 1993 to 84% in 2007.
If we do not do this, and if we do not hold out any longer afterward (Belgian public debt rose sharply after 2007), we will have to come up with last-resort measures, such as one that would force the French to finance a larger portion of their government’s debt at low interest rates in place of foreign lenders—which would obviously amount to a massive tax on French savers’ savings.
Let us not think that leaving the euro—or the constraints it imposes—would ease the pressure. On the contrary: France would then be thrown into the void without a parachute.
Why are we in this situation, more so than any other country? Because all of us—those in power and those governed—have let go of the railing for at least ten years. Some out of demagoguery. Others out of a lack of courage. All through a quiet collusion among the living at the expense of future generations, who will have to pay for our follies, one way or another. Few have proposed massive budget-cutting plans over the past 20 years.
No presidential candidate is talking about this. Nor is any of them seriously addressing the need to adopt a wartime economy in the face of the Russian threat, the climate threat, the demographic threat, and the technological threat.
We must realize that the world is watching us. The banks, investment funds, and insurance companies around the world that finance us are watching us with astonishment bordering on consternation—a sentiment that precedes withdrawal.
We would pay dearly for this blindness. There is still time to wake up.
Image:A Hand Holding an Empty Purse of Peter Paul Rubens