Global Insight Perspective | |
Significance | Yesterday, French President Nicolas Sarkozy presented the country's largest fiscal stimulus plan in 27 years. |
Implications | The government is keen to fend off the worst effects of the looming recession via heavy public spending. |
Outlook | This is not the first stimulus package unveiled by the government, and there are serious concerns over the long-term impact on France's public deficit. |
Investment, investment, and more investment—that is French President Nicolas Sarkozy's answer to the expected sharp downturn in the economy. Yesterday, Sarkozy announced the details of his latest economic stimulus plan. In some respects, the latest measures represent a continuation of previous attempts to solve France's economic woes (see France: 29 October 2008: French President Unveils Plans to Tackle Unemployment). However, it is by far the boldest plan unveiled, against which previous proposals pale in comparison in terms of scale and cost. The measures unveiled yesterday will cost an enormous 26 billion euro (US$33.23 billion), making it the costliest stimulus package in the country since 1981. Sarkozy shrugged off criticism of the scale of the investment plans by saying that doing nothing would cost the government more in the long run.
Investment Incentives à la Française
The cash-strapped centre-right government will be hard-pressed to find the necessary funds for its latest project. According to the logic behind the latest proposals, the government's "buy now, pay later" strategy is the only way to stem the current crisis. Knowing that the measures may not go down well with a number of influential representatives, Sarkozy distinguished between "good debts", which the state incurs in order to keep the economy afloat, notably through investment,and "bad debts", which focus on boosting consumption. Sarkozy further plans to counterbalance the high debt level via cuts in public administration. According to Sarkozy, the state must rid itself of the "administrative folly" that has gripped the country.
Main Points of the Stimulus Plan
- Tax: The government will reimburse taxes paid in excess by companies more swiftly, in order to boost firms' coffers. Estimated cost: 11.4 billion euro.
- Transport: Sarkozy plans to pool 10.5 billion euro from state sources, local governments, and receipts from large public enterprises to improve the country's infrastructure. Estimated cost: 10.5 billion euro.
- Automotive Sector: Financial institutions lending funds to car manufacturers will receive more state funds to ensure continued lending possibilities for automakers. Estimated cost: 2 billion euro.
- Labour Market: The government will invest more funds to boost employment, notably by supporting small and medium-sized enterprises (SMEs) with 10 employees of fewer if they hire staff. Estimated cost: 1.2 billion euro.
- Welfare Benefits: The government will offer a 200-euro cheque to every person eligible for the Revenu de solidarité active (RSA), the successor scheme to the previous welfare benefit programme, the RMI. Estimated cost: 800 million euro.
Outlook and Implications
French governments, whether from the left or the right of the political spectrum, have long advocated a strong state, and see nothing wrong with heavy government intervention in a troubled economy. Sarkozy, however, claims that the latest government intervention is only temporary. Regardless, the costs of the plan will have a long-term impact—by 2012, when the country is due to hold its next parliamentary and presidential elections, the economy will have to have staged a significant recovery in order to justify the tax hikes that Economy Minister Christine Lagarde envisages from 2011 onwards.
The French plan is a bold one. However, two important questions remain.
First, what will be the impact of the package on the country's already damaged fiscal accounts? The government has announced that the extra spending will take the public deficit in 2009 from a projected 3.1% of GDP to 3.9%, well above the 3.0% ceiling stipulated by the European Union (EU) Maastricht Treaty. Lagarde has indicated that the impact of the measures on the budget after 2010 should be limited, as most of the extra spending will be executed in 2009. Moreover, some of the investment expenditure outlined in the plan is actually expenditure that had already been planned for the coming years, which has now been brought forward. However, concerns about the size of the fiscal shortfall remain. The draft budget for 2009 was predicated on GDP growth of between 0.2% and 0.5%. Although this is likely to be closer to reality than the initial estimate of growth of 1.0%, the recent intensification of the international financial crisis means that it still looks very optimistic. IHS Global Insight is currently forecasting GDP to decline by 0.3% in 2009—which would be the first full year of contraction since the recession of 1993—but the worsening international environment is likely to lead us to revise this forecast downwards in our next interim round. Weaker growth will certainly have a dampening impact on tax receipts, and therefore on the fiscal figures.
This leads onto the next question: will these measures have any impact on activity? To say that the current international situation is difficult would be an understatement. Although the European Central Bank (ECB) has been cutting its policy rate aggressively during recent months—including a reduction of 75 basis points yesterday—it is widely recognised that, given the gravity of the situation, lower interest rates may not be enough. In this context, we believe that, in general, the measures implemented by the government are the right ones. By investing in infrastructure and research, for example, the government is not only boosting activity in the near term, but it is also increasing the future productive capacity of the economy. For this reason, we think that loosening fiscal policy in this way is preferable to cutting indirect taxes, for example. There is a caveat, however: the deficit will have to come down sooner rather than later. Therefore, looser fiscal policy now should be translated into a much more contractionary fiscal stance once the effects of the crisis dissipate, weighing down on growth prospects in the medium term.