An Empirical Analysis on Fiscal Sustainability in France: Implications and Prospects

Abstract

For more than 30 years France has been facing high fiscal imbalances and rapidly growing debt ratios and the recent global financial crisis worsened French public finances. In the long term public debt levels are expected to increase mostly due to large future costs related to social security transfers; among others are the age related government outlays that are expected to grow. In this paper, we investigate the sustainability of the existing fiscal policy. We also examine what current fiscal policy implies for the debt to GDP ratios in the next 14 years. We make projections for future fiscal consolidation by simulating different scenarios involving reforms to the social security funds as well as financial and economic indicators, such as the long term interest rate on government bonds and the GDP growth rate. Our sustainability test show that the current fiscal policy ran by French authorities is not viable. Our projections of the primary surplus ratios and public debt to GDP ratios lead us to conclude that the path pursued by the French government is unsustainable. More specifically, we establish that the path of future debt to GDP ratios will show explosive characteristics unless the GDP growth rate surpasses the long term interest rate. In an attempt to stabilize for the explosive debt ratios we impose a value of 0.03 on the estimated response coefficient of the primary surplus towards foregoing debt to GDP ratio. This is evidence that radical measures are imperative to stabilize and hinder the rapid growth of the French public debt.