Government debt in France

On December 4, the French government, which had only been in power for three months, collapsed. Prime Minister Michelle Barnier's government was called to a vote of no confidence when Barnier tried to push through a social security financing plan without a parliamentary vote.

A central issue behind the French government's difficulties is the size of its budget deficit. France’s deficit has been revised up to 6.1% of GDP from 4.4%. The social security bill proposed by the Barnier government would add to the country’s indebtedness. Like so many countries, France's budgetary position was weakened by the COVID-19 pandemic, with its national debt 111% of GDP. Indeed, its national debt has remained well over 100% of GDP since 2020.

France’s debt problem can be viewed in three ways. During his first term as president, Emmanuel Macron pushed through a cut in corporate tax on company profits from 33.3% to 25% and abolished France’s wealth tax. While this temporarily boosted economic growth, it was not sustained, reducing the country’s tax revenues.

Next, the sheer scale of the cost to the French government of supporting businesses and households through the pandemic added a significant percentage to the country’s budget deficit and national debt, and the government could not manage its debt downwards when the pandemic finished.

Finally, the cost to the French government of servicing its debt has increased. A bigger debt means bigger repayments and interest costs, and the financial markets have also increased the interest rates they are charging the French government. The markets are concerned about the high level of government debt and are charging an interest premium because of this. Moody’s, the credit ratings agency, has downgraded France’s economic outlook from “stable” to “negative”, which has worried domestic and international investors who buy French government bonds.

These debt problems are a significant challenge for any French administration that emerges from the collapse of the current government. The government's fiscal constraints are likely to negatively affect economic growth going forward and the economic well-being of French households.

Some possible questions to discuss with a class

1. What does French government indebtedness mean?
2. What are the costs to the French government of significant indebtedness?
3. Why has government indebtedness increased in France?
4. Discuss the problems for the French government in trying to reduce its indebtedness.