What would the French economy be like without “whatever the cost”?

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France experienced an unprecedented recession in the Covid-19 crisis. GDP fell by 17 points during the height of the crisis (third quarter of 2020). The speed of exiting the crisis is also unprecedented. In just seven quarters, GDP returned to pre-crisis levels.

This extraordinary resilience of the French economy is strongly linked to measures taken by the government since the onset of the health crisis. Without them, GDP decline was 37 points of GDP, the pre-crisis level. GDP should have recovered after 13.5 quarters, according to estimates by the Center for Economic Research and its Applications (Cepremap). The combination of increased short-term public spending and reduced tax burdens in the medium term explains this dynamic move.

These exceptional measures included raising the debt-to-GDP ratio to 115%. However, according to our analysis, if the government had not taken these steps, the debt ratio could reach 145% given the collapse of activity.

Finally, the public spending and tax exemption program set out in the Financial Bill (PLF) 2022 will put France on a stronger GDP growth trajectory (1.65%) than the GDP growth trajectory (1.5%) over the last two years. ..

However, this relatively good health of the French economy at the end of 2021 needs to be carefully evaluated as it is not stable. Nevertheless, it is useful to assess the effectiveness of the measures already taken and to infer the outlook for the French economy in the future.

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Over a year of victory

The health crisis has brought economic conditions through both the goods and services markets and the labor market, as well as the unprecedented restrictions on domestic exchange in international exchange. Since then, exceptional economic policy measures have been taken to change public consumption (employment, education, health, culture, etc.), public investment (R & D, weapons, buildings, infrastructure) and taxation (taxation on businesses and homes). I did.

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Exhibit 1: Covid-19 crisis in the absence of macroeconomic policies. Note: Real GDP per capita observed (black line), forecast by PLF 2022 (blue line), and simulation by CEPREMOD model in the absence of macroeconomic policy (red line). Index 100 for the first quarter of 2020. PLF2022 and author calculations

Exhibit 1 compares the “real” trajectory of the French economy (black and blue lines) with the scenario in which the exceptional budget and fiscal measures taken by the government were eliminated (red lines). It shows how these policies protected the French economy from even greater crises.

In both cases, with or without support policies, a valley of economic activity will occur in the third quarter of 2020, following the economic blockade. The observed contraction is -17% compared to the pre-crisis situation, but in the absence of exceptional measures, the decline in economic activity is estimated to be -37%. Therefore, in the midst of the crisis, macroeconomic policies would have prevented a loss of about 20 percent of GDP in 2019.

In the four years following the crisis, this measure has made it possible to avoid even greater losses in GDP. In fact, the observed GDP has already returned to pre-crisis levels (1 percentage point below), but without these exceptional measures, it is almost 10 percentage points below pre-crisis levels. Without these policies, activity levels in 2019 would not have reached the first quarter of 2023, a year or more behind (5.5 quarters).

Increased public consumption explains most of the losses avoided in the first two years after the crisis (up to 85% in the period 2020-2021), and tax exemptions play a major role in the years that follow. (Period from 2022 to 2023). Public investment will explain the rest (about 15%) and will be even over the entire period.

Public debt has finally been contained

Macroeconomic policies to support economic activity have represented a significant financial burden on the state in the context of limited tax revenues due to slowing economic activity. Therefore, they lead to a large public deficit and raise the level of public debt.

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Figure 2: Evolution and simulation of public debt in the absence of macroeconomic policies (as a percentage of GDP). Note: Debt in the general government sense of Marstricht is observed GDP (black line), Covid-19 pre-crisis forecast by PLF 2019 (blue line), simulation by Cepremod model in the absence of macroeconomic policy (red). Line)). Insee, PLF2019 and author calculations

Was it possible to curb the increase in public debt by giving up these support policies? Exhibit 2 compares the observed changes in public debt with those in the absence of exceptional measures to support activities.

The share of public debt in GDP has increased by more than 20 points over the five years of Nicolas Sarkozy, primarily due to the financial crisis of 2008-2009. During François Hollande’s five-year term, it progressed slowly, but did not experience a major crisis during this period (Germany’s debt fell from 88% to 70% of GDP during this period). , The beginning of Emmanuel Macron’s five-year term.

With the management of the Covid-19 crisis, this ratio increased by 15 percentage points, and by the end of 2021, public debt was at the level of 115% of GDP. Without measures to support the economy, the worsening of the economic crisis would have led to a sharper rise in the public debt ratio. According to our simulation, this ratio should actually reach the level of 145% of GDP from the third quarter of 2020 (see the red curve in Figure 2).

This 30-point difference in debt ratio between the two scenarios is explained by the greater magnitude and greater sustainability of the crisis that would have occurred without support (see above). In conclusion, the “whatever the cost” policy seems to have been a better financial operation than the “laissez-faire” policy surrounded by Marstricht standards.

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Figure 3: Evolution since 2007 and forecast of France’s per capita GDP by 2025. Note: Real GDP per capita (solid black line) observed from the fourth quarter of 2021 (index 100 in the second quarter of 2017) and forecast by PLF 2002 (solid red line). Real GDP per capita trends of 1.2% from the start of Sarkozy’s (black dashed line) and Hollande’s (blue dashed line) mission, and 1.35% from Macron’s mission start (dashed line rose). PLF2022 and author calculations

The government announced budget and tax policies up to 2025 at PLF 2022. Under the assumption that there is no new epidemic wave, Graph 3 shows that these policies have fixed France at an annual growth rate of 1.35% (1.65) per capita. Growth rate by adding population growth). Therefore, this growth rate is higher than the growth rate for the past two years (per capita growth rate is 1.2%, and when population growth is added, it is 1.5%).

Therefore, beyond crisis mitigation, macroeconomic policies implemented through permanent tax cuts and support for public investment appear to have a positive effect on growth in the medium term.

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François Langott, Professor of Economics, Le Mans University Fabian TripiaProfessor of Economics, University of Paris Dofine-PSL

The original version of this article was published in The Conversation.