Sapin’s speech also mentioned the 2015 deficit forecast. The French Stability Program, published in April, assumed that the general government deficit would reach 3% of GDP in 2015, a target agreed with the European Commission. Today’s speech suggested that the deficit would only be reduced by a tenth next year to 4.3%, a 1.3%-pt miss with respect to the April forecast.
The 3% deficit objective, for which a two-year delay had been negotiated by the EC, is now only expected to be reached by 2017 –an extra two-year delay. The April Stability Program suggested the deficit would only be 1.3% of GDP in 2017.
Why has the deficit been revised up?
Sapin mentioned two reasons for the deficit miss, the lower than expected growth and the inflation outcome. Back in April, the government expected GDP to increase by 1% this year and 1.7% next year. The revised forecast now sees GDP growth at 0.4% this year and 1.0% next year. This downward revision could explain a 0.3%-pt to 0.4%-pt increase in the deficit in 2014 and 2015, relative to the figures provided in the Stability Program in April.
Another reason mentioned by Sapin is the lower than expected level of inflation. According to the Stability Program, the level of inflation was expected to reach 1.2%oya this year and 1.5%oya next year. These numbers were revised down to 0.5% for 2014 and 0.9%oya for 2015. Thus the denominator of the deficit ratio will increase at a softer pace than expected this year. But the impact of the lower inflation level on the deficit ratio is modest –less than 0.1%-pt of GDP.
The growth and inflation story only explain part of the deficit revision in 2014 and 2015. We noticed that fiscal revenues in 2013 were lower than expected with GDP growth in line with expectations, thus the elasticity of fiscal revenues had declined. The government also made the same assessment last year. Nothing similar was mentioned in today’s speech, but we would not be surprised if this factor played a role in the deficit revision.
No further fiscal tightening foreseen
The French government decided not to impose any additional fiscal tightening for the coming years. As a result, the deficit path was lowered and the 3% target was delayed for another two years (2017). The government confirmed its commitment in reducing spending by 2017 (€50bn saving relative to the budget proposed in 2013). The €40bn responsibility pact, whereby companies beneficiate from lower labour costs, was also confirmed.
The details of the budget won’t be known until early next month when the 2015 budget will be announced and detailed measures will be presented. Today’s deficit revision was very large and will likely generate some discomfort within the European Commission and among Euro area economies where fiscal consolidation is seen as a priority. This issue will likely be debated at the next Eurogroup meeting on September 12, and we will then get a sense of where positions stand with respect to fiscal consolidation in the region.