Deficit, debt: the Banque de France warns of a market reaction

Posted Sep 27, 2022, 6:57 PMUpdated on Sep 27, 2022 at 8:40 PM

Barely four days after their appearance, “trussonomics” have already become an essential reference – and not necessarily to their advantage. While Bercy presented a very spendthrift finance bill for 2023 on Monday, the governor of the Banque de France on Tuesday waved the British scarecrow embodied by the economic policy led by Liz Truss, to warn the government of Elisabeth Borne against any budgetary drift.

“It is vital not to add uncertainty to uncertainty, and to stay on course”, and in particular “the course of a French budgetary policy anchored on a standard of expenditure really held and allowing deleveraging over time” , warned François Villeroy de Galhau, during a hearing before the Finance Committee of the National Assembly.

Fiscal shock

The speech is traditional in the mouth of a central banker, but it now has concrete illustrations of the consequences of too great a relaxation of public accounts. “For the past few days, there has been greater volatility in the markets, in particular foreign exchange […] and interest rates, with the very sharp rise in British rates after Friday’s announcement of massive budget deficits,” he reminded MPs.

Liz Truss’ economic package, unveiled at the end of last week – which includes £45 billion in tax cuts – has sparked deep market concern over the scale of the unfunded fiscal shock: the pound plunged to an all-time low against the dollar while Britain’s 10-year borrowing rates jumped to the level of an Italy shaken by the arrival of the far right in power.

Admittedly, the two countries are not in a comparable situation – Bercy is aiming for a stabilized deficit of 5% of GDP next year, while that of the United Kingdom could explode to 9% of GDP according to Barclays bank. But France’s 2023 finance bill promises to be spendthrift both to cushion the shock caused by inflation – 45 billion for the tariff shield – but also for Emmanuel Macron’s many priorities, with example the creation of nearly 11,000 civil servant posts. As for the executive’s promises of long-term savings – with volume growth (excluding inflation) capped at 0.6% over five years – they raise many doubts.

No new “whatever it takes”

François Villeroy de Galhau is concerned about the fact that “the public debt ratio, which has already deteriorated sharply following the Covid shock, will at best be stabilized by 2024”, in particular because of the cost of support measures such as the tariff shield.

The Governor of the Banque de France also warned against the temptation “of a new ‘whatever the cost'”: “The demand support policies, largely justified in the context of the Covid shock, are at both less available and less adapted to the current crisis”, which “results in problems of supply”. He therefore calls for “strengthening our productive capacity, in order to produce more and better”.

In his view, this notably involves “increasing the quantity and quality of work” in France. “Increasing the labor supply and its qualification is an absolute priority,” he adds. What this time bring it closer to the government discourse which intends precisely to increase the labor supply, in particular by betting on pension reform.

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