Why does France have systematic difficulties in obtaining a budget deficit below 3%?

Question

According to this article France plans for a budget deficit slightly over the EU allowed limit of 3%:

France's budget deficit is likely to overshoot the European Union's limit of 3 percent of GDP next year and stand at around 3.2 percent, Prime Minister Edouard Philippe told Les Echos newspaper in an interview.

According to Reuters this is hardly the first time when France is not a good EU country when it comes to obeying EU 3% GDP limit:

Shrinking to a better-than-expected 2.6 percent of gross domestic product in 2017, the budget shortfall came in below the government’s 2.9 percent target, the best reading since before the global financial crisis in 2007.

Macron, a fervent europhile, had made respecting EU budget rules, after years of delays by his predecessors, a cornerstone of his aim to repair France’s reputation as a serial offender of euro zone rules.

This threshold (3%) is something I often heard where I live (Romania) and it is some sort of nemesis for the government which seem to do all sort of economical tricks to obey it.

Question: Why does France have systematic difficulties in obtaining a budget deficit below 3%?

Answer 1

Why does France have systematic difficulties in obtaining a budget deficit below 3%?

First, let's put the question in context: while it's true that France is one of the few EU countries still struggling with the 3% rule, many countries have been above the limit in the aftermath of the financial crisis. For example the UK had a higher deficit/GDP ratio than France until 2016. However the UK implemented a stronger austerity policy than France, and this contributed to decrease the UK budget deficit faster (note: the UK and France are comparable in terms of economy size, but the UK isn't in the Euro zone).

Mathematically there are two ways to decrease the deficit/GDP ratio: reduce the deficit or increase the GDP (or both).

• The French economy tends to be marginally less affected than other countries by the global economy. On the one hand France's GDP was less impacted by the crisis than other countries, but on the other hand these other countries recovered faster and more strongly than France (see GDP evolution 5 EU countries). So for France the GDP growth has not been strong enough in the recent years to significantly lower the deficit/GDP ratio.

• Reducing the deficit means cutting government spending or increasing government income, i.e. raise taxes (or both). Most countries hit by the crisis in the EU zone implemented austerity policies to satisfy the EU rules. France did as well, but certainly not as efficiently as other countries. This is open to interpretation, but it's possible that:

  • Governments in France might tend to avoid painful policies which could trigger a massive backlash
  • The political and economic weight of France in the EU might make French governments think that the EU wouldn't dare punish them too hard.

Note: it is worth mentioning that all the French governments in the past decade (Sarkozy, Hollande and now Macron) said that they were going to:

1. Make sure that France satisfies the EU criteria by cutting government spending (austerity)
2. Once France is in a stronger position, negotiate again with the EU (they usually say Germany) for more flexibility/solidarity in the EU zone.

So far none of these governments reached stage 2.

(edited thanks to Evargalo's comment)

Answer 2

The shortest answer: preference.

The short answer: time preference and a preference for risking the punishment.

The longer answer...

If you accept that the 3% deficit limit can be generalized and France is not alone in having a deficit most years, then the question is similar to one that asks: why do countries sometimes have deficits?

The budget balance is determined by factors such as the time preference (the perceived value of current government spending and the perceived value of deferred or future government spending) and the ability to raise taxes without decreasing productive activity and the anticipated future government income stream. The birth rate, immigration, longevity, the retirement age, and productivity improvements would be some of the factors affecting future government income.

If you think a deficit is persistent or systemic, then it must be that the combination of the time preference and the set of other factors makes it so. A financial model can be developed to accept the combination of factors in order to project the current and future deficits. The estimates of those factors become assumptions. A discount rate, which is like an interest rate, can be used to represent the time preference. The process will make the intertemporal choice. The opposite sides of a political argument might both be critical of the assumptions but each side might find bias in a different estimate.

Wikipedia says of the Treaty of Maastricht...

One of the obligations of the treaty for the members was to keep "sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP".

There can be punishment for breaking the rules...

the EU Member States added, with the Treaty of Maastricht, a new provision to the EC Treaty which seeks to secure respect for ECJ judgments. The new procedure according to Article 228 of the EC Treaty is a special judicial procedure for the enforcement of judgments that provides for the imposition of penalty payments or lump sums by the ECJ on a Member State which fails to comply with an earlier judgment of the ECJ that a Member State is in breach of its obligations under Community law

If there is persistence in rule breaking it might mean that there is a preference for risking the punishment.

The general observations about behaviour can be applied to a specific case. Since Reuters reports that "France's budget deficit is likely to overshoot the European Union's limit of 3 percent of GDP next year and stand at around 3.2 percent" it means that there is a preference in France for risking the punishment.

Notice that the punishment is for enforcing the ECJ judgment so first a country would have to fight in court, lose and face a judgment, ignore the judgment. Since there is a process to be followed there is not any immediate risk of punishment.

Answer 3

France has historically been very bad at living within its means. They haven't balanced a budget since 1974.

During the runup to the Euro treaty join in 1992, the 3% limit (one of the 3 criteria the German central bank had required before supporting the departure from the Deutschmark) was already causing political stress.

Consider this:

• France has extensive social and welfare programs that are popular, but costly. The weak French economy and unemployment rate would make sudden contraction quite painful.

• The French state employs many many public servants, and in the past, successive governments have often viewed more as a way to reduce the headline unemployment rate.

• French tax rates are already quite high, so can't be easily increased to balance a budget. A better bet would be to grow the economy sufficiently to increase revenues, but that's easier said than done and might require politically costly reforms.

• The state has extensive commitments to support various industries, although European rules have trimmed down the more obvious cases in recent years.

• When you've accumulated enough debt, servicing it takes ever more funds, making balancing the budget even harder. (The notion of primary budget balance tracks whether you are at least balancing outside of debt payments, but I don't know if France has managed even that recently)

• The French public would take austerity measures very unkindly, perceive them as surrendering to financial interests and would not hesitate to manifest their anger, violently if needed. Witness the Gilets Jaunes.

Contrary to, for example, Canadian voters, the French do not perceive a balanced budget as something really important. I immigrated from France to Canada in the mid 90s, and while Canadians at the time generally took pride in finally getting their runaway budget deficits under control, there was also a lot of bitterness at the cuts to social programs that had been made to balance the budget. Before leaving France, in my acquaintances, and in the press, there was more anger at the Brussels-imposed rules around the 3% limit than there was concern about why we were always in deficit.

I just don't see any French government pulling off balanced budgets in the short or medium term, at best they'll skirt around the 2.2-3% mark.

I am familiar with Keynesian economics and deficit spending is a useful policy mechanism, but, once established, a pattern of persistent deficits with voter approval is very hard to shake off (at least until a major crisis hits) and I fear that France is caught in this trap.

From https://fr.wikipedia.org/wiki/Déficit_public_de_la_France

1974 Le budget des administrations publiques est pour la dernière fois en léger excédent4.

:

1974 The budget is, for the last time, slightly in the black.