Prospects of debts and deficits in the French new political era

Jérôme Creel (OFCE & ESCP Europe)Paul Hubert (OFCE)

Francesco Saraceno (OFCE)

This paper was prepared for the Conference “Fiscal and debt policies for the future” hosted by the Cambridge Trust for New Thinking in Economics, Cambridge (UK), April 11 2013. Part of this research benefited of funding from the EU Seventh Framework Programme (FP7/2007-2013) under grant agreement 266800 (FESSUD).

Motivation

• Context:– Candidate Hollande against the Fiscal Compact– Sovereign-debt crisis: contagion to the Eurozone & a

divergence device within the Eurozone– France is in-between the strong ‘core’ and the

‘periphery’: common features with the ‘core’ and the ‘periphery’

– President Hollande will apply the Fiscal Compact

Outline

• French Public finances: a comparison and its key components

• Managing public debt

• Assessing the consequences of the Fiscal Compact on French macro variables

French public finances: international comparison

French public finances: spending and composition

French public finances: receipts and composition

Properties usually attributed to the French tax system:Tax levies are highThe income tax has a narrow basisThe tax system is not progressiveThe tax system is complex

French public finances: deficits (1)DEF = AS + CADEF = IP + PDEF = IP + PAS + PCADEF

French public finances: deficits (2)DEF = AS + CADEF = IP + PDEF = IP + PAS + PCADEF

Debt: are issuances an issue?

Debt management

Costs or benefits with the Fiscal Compact? Methods

• Two assessments– Empirical

• VAR estimates of output gap & inflation (CADEF and debt exogenous variables) btw 1972 & 2008

• 4 possible fiscal rules from 2010 on• Counterfactual simulations

– Theoretical• Small-scale new Keynesian model with both BL and FL

expectations; AD depends on public spending; risk premium on public debt; Maastricht-consistent calibration

• 3 possible fiscal rules from 2012 on• Out-of-equilibrium simulations

Costs or benefits with the Fiscal Compact? Empirical results (1)

Costs or benefits with the Fiscal Compact? Empirical results (2)

Costs or benefits with the Fiscal Compact? Theoretical results

Conclusion

• Yes, France has had high deficits and debts• Yes, France has had automatic stabilisers• Yes, France has managed its debt wisely• Yes, France has had a sharp fiscal contraction• Yes, France has suffered from the stringency of

EU fiscal rules• Yes, the end of the tunnel has not yet appeared.