the day european union governments spent the last of their ... · the year. this is almost seven...

Institut Économique Molinari | Paris-Brussels

THE DAY EUROPEAN UNION GOVERNMENTS

SPENT THE LAST OF THEIR ANNUAL REVENUES

Nicolas Marques & Cécile Philippe

November 2017 — 3rd edition

SUMMARY OF THE STUDY — 2 PURPOSE OF THE STUDY — 3 SPECIFICITY OF THE APPROACH — 4 LAST KNOWN DAY ON WHICH EU CENTRAL GOVERNMENTS HAVE SPENT ALL THEIR RESOURCES — 4 Calendar of dates on which central governments have spent all their revenues — 4 The calendar is getting tighter: 15 governments deplete their revenues in December — 5 Four EU central governments are in surplus — 5 The EU’s overall situation improves for the seventh year in a row — 5 Central governments continue to be the main source of public deficits — 5 FRENCH LESSONS — 10 France finished last in the EU, with 55 days of unfunded expenditures — 10 A government with a situation deteriorating over 20 years compared to the rest of the EU — 10 A government with a situation in steady and continuous decline since 1980 — 11 In addition to the government itself, social security administrations and overall public spending remain in the red — 13 Imbalances in France despite a substantial increase in revenues — 16 French imbalances that are not associated with greater well-being — 18 Recurring deficits are worrying from an economic and societal standpoint — 21 GLOSSARY — 24 DETAILS ON DATA — 25 DETAILS ON CALCULATIONS — 25 CONTACT FOR ANY QUESTION OR INTERVIEW — 26 MISSION OF THE IEM — 26 TO BECOME AN IEM DONOR — 27

The day European Union governments spent the last of their annual revenues — 3rd edition Nicolas Marques, Cécile Philippe ● November 2017 1

TABLE OF CONTENTS

SUMMARY OF THE STUDY Central governments are the main source of public deficits in the EU EU central governments use up their resources December 6 on average, 25 days before the end of the year. This is almost seven days later than the year before, representing a significant improvement. Among the EU’s 28 central governments, four were in surplus last year, including Sweden, with a surplus equal to 20 days’ spending, and Germany, with a seven-day surplus. Their revenues for the year enabled them to finance all of the year’s expenditures and to lower their debt. The 24 other central government spent the last of their revenues before year’s end. Fifteen of them had consumed their resources by December and nine of them by November. Despite this improvement, central governments remain the dark spot in European public finances. Across the EU, central governments account for most of the slippage in public accounts, with 25 unfunded days. Local governments have been balanced since 2014 (with four days’ surplus in 2016). This is also true of social security administrations since 2016 (one day’s surplus). As a result, taking all administrations together, the various EU countries had consumed the last of their public revenues 13 days before the end of the year. This is five days later than the year before. The French central government’s position continues to erode, unlike the rest of the EU The French central government spent the last of its resources on November 7, or 55 days before the end of the year. It now accounts for the greatest imbalance in the EU, ahead of Spain (50 days) and Romania (48 days). The gap is also growing between France and the EU average, climbing to nearly 30 days compared to 22 days the year before. This weak performance is due to France’s inability to balance its accounts sustainably since the latest crisis. While EU central governments have used the last seven years to reduce their deficits, this is not what we see in France. The post-crisis balancing of accounts stopped prematurely, four years ago. The French central government’s deficit has gone higher again since 2014, at a pace of one more unfunded day per year, while the EU lowered its deficits by five days per year on average. These disappointing results are causing France’s position to erode yet again. The most recent balanced budget produced by the government and the various bodies in the central government dates back to 1980. Since then, every budget has been in deficit, and the day when the last of the resources were consumed has climbed a day-and-a-half per year on average. The central government is not alone in France in failing to balance its accounts. This is also true of the social security administrations. They remain in the red, despite an array of reforms aimed at controlling the rise in health care expenditures and at tightening pension plan operations.


PURPOSE OF THE STUDY The purpose of this study is to compare central government revenues and expenditures in the 28 European Union (EU) member countries to determine the day they depleted their annual revenues and began to live on credit. This study, covering all 28 EU countries, is based on the latest annual data from Eurostat, updated on October 23, 2017. It enables changes in imbalances to be measured over time and for each country’s situation to be compared. This approach is intended to cast issues in a new light for ordinary citizens in an area that non-specialists may have trouble following. Deficits are often expressed as percentages of GDP, which is not an easy concept to grasp. Debates on government budgeting involve billions of euros, whereas the general public is more accustomed to thinking in terms of hundreds or thousands of euros. In many cases, calculations of savings are presented by public authorities in relation to underlying growth assumptions rather than to actual expenditures. This blurs the way things are understood, since “savings” are not reflected automatically in lower expenditures. We should add that debate on these complex topics often comes down to stances that are disconnected from the actual issues. This has been especially true in France over the last few years, with a proliferation of attacks on “budget austerity” that bear little relation to fact in a country where public spending does not decline in times of crisis and where it declines less quickly than elsewhere in times of recovery. Hence the interest in an approach that enables the general public to get a clear and simple view of the scope of the issues and to follow how they change over time.


SPECIFICITY OF THE APPROACH This study provides for a better understanding of central government slippage, put in current government language using a solid and accessible method. Revenues are divided by expenditures and multiplied by 365, enabling financial overruns to be expressed in days over a given year. This method is similar to usage in the financial sector, with analysts habitually presenting working capital requirements, for example, in days of turnover. It also has the advantage of making sense to anyone who has wondered how to make ends meet at the end of the month. This work focuses on central governments, in other words government administrative bodies and other central bodies that normally have jurisdiction over a country’s entire territory. Across the EU, these are the administrations with the most unbalanced accounts. Nevertheless, the calculations also cover other administrations (state governments, local governments and social security funds). This provides added insight since, fortunately, not all countries run deficits in each of these administrations. LAST KNOWN DAY ON WHICH EU CENTRAL GOVERNMENTS HAVE SPENT ALL THEIR RESOURCES Calendar of dates on which central governments have spent all their revenues


Annual tax revenue spent by’ Annual tax revenue spent by’ Annual tax revenue spent by’

November December January following year

6 European Union (28

countries) 4 Cyprus 7 United Kingdom 7 France 7 Slovenia 7 Germany 8 Hungary

11 Spain 18 Austria 10 Malta 13 Romania 19 Croatia 20 Ireland 20 Sweden

21 Poland 21 Netherlands 22 Denmark 22 Greece

26 Finland 26 Czech Republic 26 Portugal 27 Estonia 26 Italy 27 Luxembourg 27 Belgium 27 Lithuania 27 Slovakia 29 Bulgaria 31 Latvia

The calendar is getting tighter: 15 governments deplete their revenues in December Compared to the previous edition, we can see a tightening of the calendar. Where one central government had spent everything before the end of October, none remains in that situation. Where two governments had been in surplus, there are now four. Four EU central governments are in surplus Among the EU’s 28 central governments, four were in surplus last year, including Sweden, with a surplus equal to 20 days’ expenditures, and Germany, with a seven-day surplus. Their revenues for the year enabled them to finance all of the year’s expenditure and to lower their debt. The other 24 central governments spent all their revenues before the end of the year. France, Spain and Romania are at the rear of the pack. France is in the most unbalanced position (55 unfunded days, a slight deterioration), followed by Spain (50 days, a slight deterioration) and Romania (48 days, a sharp deterioration). The EU’s overall situation improves for the seventh year in a row The latest Eurostat numbers show that EU central governments, taken together, spent the last of their revenues 25 days before the end of the year. Their overall situation continues to improve, with a gain of seven days compared to the previous edition. However, despite a substantial decline since 2009, the number of days of unfunded expenditures remains higher than the latest pre-crisis numbers in the 28 member states (Figure 1). Central governments continue to be the main source of public deficits Across the EU, central government overruns account for most of the slippage in the public accounts. The other administrations now all generate surpluses, apart from state governments (Figure 2). The four federated state governments were in the red over all last year, with an average of three days’ unfunded expenditures. We can see an eight-day improvement between 2015 and 2016. They were in surplus in two EU countries and in deficit in two countries. The most substantial surplus was in Germany, equal to four days’ expenditures. The most substantial deficit was found in Spain, with revenues fully spent 20 days before the end of the year. Local governments were in a four-day surplus last year, with a one-day improvement observed between 2015 and 2016. They were in surplus in 23 EU countries and in deficit in five countries. The most substantial surplus was in Malta, equal to 42 days’ expenditures. The biggest deficit was found in the United Kingdom, with revenues fully spent 13 days before year’s end.


Reading: Surpluses on a green background, deficits on a red background. ● Top quartile (25% with the best performances), ● second quartile, ● third quartile, ● bottom quartile (25% with the worst performances). The French central government had depleted its revenues 55 days before the end of the year, on November 7. It ranked 28th of 28 central governments, putting it last in the fourth quartile, consisting of the one-quarter of worst performances.


Table 1 : Position of the 28 central governments of the EU

Table Situation

Amount of days when the revenues are exhausted (-) or allow to deleverage

(+)

Quartile ranking in

the EU

Ranking out of 28 in the EU

Day when the central

government has spent all of its

annual revenue

Austria Deficit -14 16 18-12-2017

Belgium Deficit -35 21 27-11-2017

Bulgaria Deficit -2 6 29-12-2017

Croatia Deficit -13 15 19-12-2017

Cyprus Excedent 4 4 04-01-2018

Czech Republic Deficit -5 10 26-12-2017

Denmark Deficit -9 12 22-12-2017

Estonia Deficit -5 9 27-12-2017

Finland Deficit -36 24 26-11-2017

France Deficit -55 28 07-11-2017

Germany Excedent 7 3 07-01-2018

Greece Deficit -9 11 22-12-2017

Hungary Deficit -23 17 08-12-2017

Ireland Deficit -11 14 20-12-2017

Italy Deficit -35 22 26-11-2017

Latvia Deficit -1 5 31-12-2017

Lithuania Deficit -4 7 27-12-2017

Luxembourg Deficit -5 8 27-12-2017

Malta Excedent 10 2 11-01-2018

Netherlands Deficit -11 13 21-12-2017

Poland Deficit -41 25 21-11-2017

Portugal Deficit -35 23 26-11-2017

Romania Deficit -48 26 13-11-2017

Slovakia Deficit -34 20 27-11-2017

Slovenia Deficit -24 18 07-12-2017

Spain Deficit -50 27 11-11-2017

Sweden Excedent 20 1 20-01-2018

United Kingdom Deficit -25 19 07-12-2017

EU Deficit -25 28 countries 06-12-2017

Social security administrations moved into the green last year, with a one-day surplus. A two-day improvement was seen between 2015 and 2016. Among the 25 EU countries with Eurostat data available, 17 had social security administrations in surplus and eight in deficit. The most substantial surplus was in Luxembourg, equal to 37 days’ expenditures. The biggest deficit was observed in Spain, with revenues fully spent 40 days before the end of the year. With all administrations aggregated, EU public administrations had consumed all of their revenues 13 days before the end of the year, marking a five-day improvement from 2015 to 2016. They were in surplus in 10 EU countries and in deficit in 18 countries. The most substantial surplus was in Luxembourg, equal to 14 days’ expenditures. The biggest deficit was observed in Spain, with revenues fully spent 39 days before year’s end.


Reading: Surpluses on a green background, deficits on a red background. ● Top quartile (25% with the best performances), ● second quartile, ● third quartile, ● bottom quartile (25% with the worst performances).


Table 2 : Position of the various EU administrations

Table

Austria -14 -14 -2 1 -12

Belgium -35 1 11 -2 -17

Bulgaria -2 4 1 0

Croatia -13 -4 5 -7

Cyprus 4 3 6 4

Czech Republic -5 37 7 7

Denmark -9 4 2 -4

Estonia -5 5 3 -3

Finland -36 -7 24 -11

France -55 4 -1 -22

Germany 7 4 8 5 7

Greece -9 33 21 3

Hungary -23 17 -2 -14

Ireland -11 17 -9

Italy -35 7 2 -18

Latvia -1 9 -5 0

Lithuania -4 23 1 3

Luxembourg -5 22 37 14

Malta 10 42 11

Netherlands -11 2 23 3

Poland -41 7 -2 -22

Portugal -35 30 25 -16

Romania -48 6 3 -32

Slovakia -34 32 -8 -19

Slovenia -24 8 -3 -15

Spain -50 -20 39 -40 -39

Sweden 20 -7 4 8

United Kingdom -25 -13 -26

EU average -25 -3 4 1 -13

Central government

State government

Social security funds

General government

Local government

FRENCH LESSONS France finished last in the EU, with 55 days of unfunded expenditures France’s central government had spent all its resources by November 7, or 55 days before year’s end. This was the worst result in the EU, worse than Spain (50 days’ unfunded expenditures) or Romania (48 days). A government with a situation deteriorating over 20 years compared to the rest of the EU In relative terms, the French situation can be regarded as a growing source of concern. The central government and its various bodies ranked 21st on average over the last 20 years (putting it first in the bottom quartile). It fell to 24th place over the last 10 years, staying at this level in the last five years. It fell to 28th place out of 28 last year (Table 3).



Table 3 : EU central governments, number of days of unfunded expenditures

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Denmark 6 1 Sweden 1 1 Germany 0 1 Sweden 20 1Sweden 5 2 Estonia -2 2 Estonia -2 2 Malta 10 2Estonia 4 3 Denmark -4 3 Sweden -3 3 Germany 7 3Luxembourg -2 4 Luxembourg -10 4 Lithuania -9 4 Cyprus 4 4Bulgaria -6 5 Bulgaria -16 5 Luxembourg -10 5 Latvia -1 5Netherlands -16 6 Germany -18 6 Denmark -12 6 Bulgaria -2 6Finland -19 7 Malta -19 7 Latvia -13 7 Lithuania -4 7Ireland -23 8 Netherlands -20 8 Malta -13 8 Luxembourg -5 8Belgium -23 9 Austria -23 9 Bulgaria -19 9 Estonia -5 9Austria -24 10 Czech Republic -27 10 Austria -20 10 Czech Republic -5 10Germany -27 11 Lithuania -28 11 Netherlands -20 11 Greece -9 11Latvia -31 12 Belgium -31 12 Czech Republic -21 12 Denmark -9 12United Kingdom -31 13 Finland -37 13 Belgium -31 13 Netherlands -11 13Lithuania -32 14 Latvia -38 14 Hungary -35 14 Ireland -11 14Czech Republic -34 15 Italy -41 15 Romania -37 15 Croatia -13 15Malta -35 16 Hungary -42 16 Italy -39 16 Austria -14 16Italy -38 17 Cyprus -47 17 Slovakia -41 17 Hungary -23 17Slovenia -41 18 Slovenia -50 18 Ireland -42 18 Slovenia -24 18Spain -42 19 Slovakia -51 19 Cyprus -43 19 United Kingdom -25 19Romania -47 20 United Kingdom -51 20 Finland -44 20 Slovakia -34 20France -52 21 Romania -52 21 Poland -44 21 Belgium -35 21Poland -53 22 Poland -52 22 United Kingdom -45 22 Italy -35 22Portugal -55 23 Croatia -53 23 Croatia -48 23 Portugal -35 23Hungary -56 24 France -61 24 France -55 24 Finland -36 24Slovakia -58 25 Portugal -63 25 Portugal -56 25 Poland -41 25Cyprus -59 26 Ireland -67 26 Greece -56 26 Romania -48 26Greece -78 27 Spain -68 27 Slovenia -60 27 Spain -50 27

Greece -77 28 Spain -70 28 France -55 28

EU average -34 EU average -43 EU average -37 EU average -25

20-year average of the number of days of revenue depletion (-) or of debt reduction (+)



Number of days of revenue depletion (-) or of debt reduction (+)

This demotion to last place is due to the inability of the central government to balance its account sustainably following the latest crisis. While European governments over all have used the last seven years to improve their budget balances, this has not been the case in France. The post-crisis rebalancing of accounts (2009-2013) came to a premature halt four years ago. France’s central government deficit has been back on the rise since 2014, at a pace of one more unfunded day per year, while on average the EU was reducing its deficits by five days per year. As such, the French central government had consumed all its resources in 2016 nearly 30 days earlier than the rest of the European Union (Figure 3). Sad to say, this inability to bolster the public accounts sustainably during an upturn is nothing new. While the EU’s average budget balances had improved each year during the 2003-2007 period, the French government saw a near-stabilisation starting in 2004, with a gain of scarcely two days over the 2004-2007 period and a relapse starting in 2007. Similarly, between 1997 and 2000, EU budget balances improved each year, whereas France experienced a relapse starting in 2000. However, the recent period seems even more worrying than in the two previous occurrences. On the one hand, the French rebalancing stalled three years earlier than the rest of the EU, compared to one year earlier during the two previous upturns. In addition, the consolidation level (-52 days in 2013) is much less satisfactory than in the two previous episodes (-38 days in 2006 and -33 days in 1999). It seems as if French public decision-makers were satisfied with higher deficits than their European counterparts and/or were unable to restore the accounts sustainably.

A government with a situation in steady and continuous decline since 1980 Beyond the recent period, Eurostat data point to a steady and continuous decline in France’s position since 1978. The latest balances experienced by the central government and its various bodies date back to 1980 (Figure 4). Since then, every fiscal year has been in deficit.


Over and above the shocks linked to cyclical jolts, the French situation has been in perpetual decline. On average, “the day when all resources have been consumed” has advanced by a day-and-a-half per year since 1980. The worst cyclical performances amounted to 32 days of unfunded expenditures in 1984, 69 days in 1993, 56 days in 2003 and 93 days in 2009 (Figure 4). The same is true of the “best” performances. The 1980 upturn helped balance the books. This state of affairs has never recurred, and phases of improvement since then have been linked systematically to ever-growing imbalances: -19 days in 1989, -33 in 1999, -38 in 2006 and -52 in 2013.

In addition to the government itself, social security administrations and overall public spending remain in the red The central government is not alone in France in failing to balance its books. This is also the case with the social security administrations, which are also in the red (Table 4). Despite an abundance of reforms regulating growth in health care spending and tightening the operation of pension plans since the 1990s, social security administrations depleted their revenues one day before year’s end in 2016. Contrary to the recurring rhetoric emphasising the measures implemented and presenting a return to balance as a given, there is not yet anything to crow about. The gain has ranged between one day (compared to the 20-year average) and four days (versus the five-year average). True, French social security administrations have climbed out of the lowest quartile on the table (they are now 18th out of 25), but this gain may look weak in view of the changes that have been made (establishment of rationing mechanisms, reduction in pensions, etc.).


Reading: Surpluses on a green background, deficits on a red background. ● Top quartile (25% with the best performances), ● second quartile, ● third quartile, ● bottom quartile (25% with the worst performances). However, French local governments moved into the green last year, with a four-day surplus (Table 5), whereas they had been in deficit the year before. We can see a reversal in trend compared to the deficits over 20 years (-2 days), 10 years (-6 days) and five years (-4 days). The positioning in relation to the rest of the EU is improving, climbing to 20th place last year compared to 23rd place over 10 years and also over five years. All the same, there is a long way to go before returning to the average positioning (12th) observed over 20 years.


Table 4 : EU social security funds, numbers of days of unfunded expendituresR

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Cyprus 140 1 Cyprus 80 1 Luxembourg 33 1 Luxembourg 37 1Finland 66 2 Finland 53 2 Finland 30 2 Portugal 25 2Luxembourg 40 3 Luxembourg 39 3 Estonia 21 3 Finland 24 3Estonia 25 4 Estonia 24 4 Portugal 13 4 Netherlands 23 4Greece 25 5 Sweden 20 5 Greece 9 5 Greece 21 5Sweden 18 6 Portugal 15 6 Romania 6 6 Czech Republic 7 6Portugal 13 7 Greece 5 7 Sweden 6 7 Cyprus 6 7Latvia 12 8 Germany 4 8 Germany 5 8 Germany 5 8Denmark 9 9 Latvia 4 9 Cyprus 4 9 Croatia 5 9Spain 5 10 Italy 3 10 Croatia 3 10 Sweden 4 10Bulgaria 5 11 Austria 2 11 Hungary 2 11 Romania 3 11Romania 4 12 Hungary 2 12 Italy 2 12 Estonia 3 12Italy 3 13 Denmark 1 13 Austria 2 13 Denmark 2 13Slovakia 2 14 Croatia 1 14 Denmark 2 14 Italy 2 14Belgium 2 15 Romania 0 15 Bulgaria 1 15 Austria 1 15Poland 2 16 Bulgaria 0 16 Slovenia 0 16 Lithuania 1 16Germany 1 17 Czech Republic 0 17 Belgium 0 17 Bulgaria 1 17Austria 1 18 Belgium 0 18 Czech Republic -1 18 France -1 18Hungary 0 19 Slovenia -1 19 Latvia -1 19 Belgium -2 19Czech Republic 0 20 Slovakia -1 20 Slovakia -3 20 Hungary -2 20Slovenia -1 21 Poland -3 21 France -5 21 Poland -2 21Netherlands -1 22 France -4 22 Netherlands -7 22 Slovenia -3 22France -2 23 Spain -7 23 Poland -7 23 Latvia -5 23Lithuania -13 24 Netherlands -8 24 Lithuania -23 24 Slovakia -8 24

Lithuania -33 25 Spain -29 25 Spain -40 25

EU average 3 EU average 1 EU average -1 EU average 1







Table 5 : EU local governments, number of days of unfunded expendituresR

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Luxembourg 16 1 Luxembourg 23 1 Hungary 46 1 Malta 42 1Malta 9 2 Hungary 21 2 Greece 35 2 Spain 39 2Greece 9 3 Greece 17 3 Spain 30 3 Czech Republic 37 3Hungary 6 4 Malta 10 4 Luxembourg 29 4 Greece 33 4Ireland 1 5 Czech Republic 3 5 Portugal 23 5 Slovakia 32 5Romania -1 6 Germany 2 6 Malta 14 6 Portugal 30 6Spain -1 7 Ireland 2 7 Czech Republic 14 7 Lithuania 23 7Denmark -1 8 Denmark 0 8 Ireland 11 8 Luxembourg 22 8Slovenia -2 9 Spain 0 9 Slovakia 11 9 Hungary 17 9Czech Republic -2 10 Croatia 0 10 Cyprus 9 10 Ireland 17 10Lithuania -2 11 Cyprus 0 11 Romania 8 11 Belgium 11 11France -2 12 Italy -1 12 Italy 5 12 Latvia 9 12Sweden -2 13 Portugal -2 13 Lithuania 4 13 Slovenia 8 13Belgium -3 14 Belgium -3 14 Germany 3 14 Germany 8 14Austria -3 15 Lithuania -3 15 Slovenia 3 15 Poland 7 15Germany -3 16 Sweden -3 16 Denmark 2 16 Italy 7 16Bulgaria -4 17 Slovakia -4 17 Croatia 0 17 Romania 6 17Italy -7 18 Slovenia -4 18 Bulgaria 0 18 Estonia 5 18Netherlands -7 19 Estonia -5 19 Estonia -2 19 Bulgaria 4 19Portugal -7 20 Austria -6 20 Austria -2 20 France 4 20United Kingdom -8 21 Romania -6 21 Latvia -2 21 Denmark 4 21Finland -8 22 Bulgaria -6 22 Poland -2 22 Cyprus 3 22Estonia -10 23 France -6 23 France -4 23 Netherlands 2 23Latvia -11 24 United Kingdom -7 24 Sweden -5 24 Austria -2 24Poland -13 25 Finland -9 25 Netherlands -6 25 Croatia -4 25Slovakia -13 26 Poland -9 26 United Kingdom -6 26 Finland -7 26Cyprus -16 27 Netherlands -11 27 Belgium -6 27 Sweden -7 27

Latvia -15 28 Finland -11 28 United Kingdom -13 28

EU average -5 EU average -4 EU average 1 EU average 4





Taking all public administrations together, France over all remains in the red (Table 7). Public administrations depleted their revenues 22 days before the end of the year in 2016. The gain ranges between two days (compared to the 20-year average) and seven days (compared to the 10-year average). The deficit is falling more slowly than in the EU over all. Our relative situation is deteriorating in comparison to our neighbours: whereas French public administrations were 14th in the EU over 20 years (second quartile), they were 25th last year (bottom quartile).



Table 7 : EU General governments, number of days of unfunded expenditures

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Luxembourg 17 1 Luxembourg 11 1 Luxembourg 10 1 Luxembourg 14 1Finland 9 2 Sweden 1 2 Germany 3 2 Malta 11 2Estonia 4 3 Estonia 0,1 3 Estonia 0,1 3 Sweden 8 3Denmark 4 4 Denmark -3 4 Sweden -4 4 Czech Republic 7 4Sweden 3 5 Finland -5 5 Denmark -8 5 Germany 7 5Bulgaria -4 6 Germany -5 6 Latvia -9 6 Cyprus 4 6Netherlands -12 7 Bulgaria -13 7 Czech Republic -12 7 Greece 3 7Germany -13 8 Austria -17 8 Lithuania -13 8 Netherlands 3 8Belgium -13 9 Czech Republic -19 9 Malta -13 9 Lithuania 3 9Austria -17 10 Netherlands -19 10 Austria -13 10 Latvia 0,4 10Latvia -20 11 Malta -19 11 Bulgaria -14 11 Bulgaria -0,4 11Ireland -23 12 Belgium -20 12 Finland -16 12 Estonia -3 12Italy -23 13 Italy -23 13 Netherlands -16 13 Denmark -4 13France -24 14 Hungary -26 14 Hungary -17 14 Croatia -7 14Czech Republic -26 15 Cyprus -26 15 Italy -20 15 Ireland -9 15Slovenia -27 16 Latvia -27 16 Belgium -20 16 Finland -11 16Lithuania -28 17 France -29 17 Romania -22 17 Austria -12 17Spain -30 18 Lithuania -31 18 France -26 18 Hungary -14 18Cyprus -30 19 Slovakia -34 19 Slovakia -26 19 Slovenia -15 19United Kingdom -31 20 Slovenia -34 20 Poland -29 20 Portugal -16 20Romania -33 21 Poland -35 21 Croatia -30 21 Belgium -17 21Poland -34 22 Croatia -35 22 Cyprus -33 22 Italy -18 22Malta -35 23 Romania -39 23 Portugal -36 23 Slovakia -19 23Hungary -37 24 Portugal -44 24 Ireland -39 24 Poland -22 24Slovakia -40 25 United Kingdom -49 25 Slovenia -39 25 France -22 25Portugal -40 26 Spain -53 26 Greece -39 26 United Kingdom -26 26Greece -53 27 Greece -57 27 United Kingdom -44 27 Romania -32 27

Ireland -64 28 Spain -53 28 Spain -39 28

EU average -21 EU average -27 EU average -22 EU average -13

20-year average of the number of days of

revenue depletion (-) or of debt reduction (+)





Number of days of revenue depletion (-) or

of debt reduction (+)

Imbalances in France despite a substantial increase in revenues We should note that, over all, the persistence of public deficits and the deterioration of the French position in relation to the rest of the EU is due above all to higher public expenditures. Public spending rose from 44.9% of GDP in 1978 to 56.4% in 2016 (Figure 5), amounting to an 11.5-point rise. This increase has not been linear, far from it. It was concentrated over four periods: 1978-1985 (+7 points), 1989-1993 (+5.6 points), 2007-2009 (+4.6 points) and 2011-2014 (+1.1 points). Meanwhile, public revenues have also been rising significantly in France in recent decades compared to GDP. They have gone from 43.2% of GDP in 1978 to 53.0% in 2016, amounting to a 9.8-point rise. This increase was concentrated over three periods, 1978-1985 (+5.8 points), 1992-1996 (+2.9 points) and 2010-2016 (+3.4 points). It was this latest rise that led to the feeling of being fed up that has become widespread among the French public over the last few years. The persistence of deficits is thus due to even faster growth in public spending than in revenues. This spiral has been maintained above all by a sharp rise in social security (with expenditures and revenues each up by 7.4 points of GDP) and local governments, due largely to waves of decentralisation (with spending up 3.3% and revenues up 4.8%). In contrast, expenditures by government per se have hardly risen as a proportion of GDP since 1978 (+0.1 point). Meanwhile, government revenues have fallen in relative terms (-3 points of GDP) in a context of a greater share of resources being taken by social protection bodies and by local governments.


Since the start of 2007, public revenues have risen very substantially, by 3.3 points of GDP, or three times as much as the EU average (+1 point). At the same time, expenditures rose even more quickly, by 4.2% of GDP, or two-and-a-half times as quickly as the EU average (+1.7 points). The result is that the public deficit grew, to 3.4% of GDP. It is higher than the EU average (1.6% of GDP) despite a significant increase in taxation (Figure 6). As mentioned above, this gap is related primarily to a growth period during which France behaved atypically compared to the rest of the EU. In times of crisis, French public administrations generally operate in synch with the rest of the EU while spending more. But they fell out of synch in the latest recovery, from 2013 to 2016 (Figure 6). Public spending barely fell in France (-0.4% compared to 2012), whereas it declined significantly in the EU as a whole (-2.6% compared to 2012). France thus prematurely shortened the traditional post-crisis phase of reduction in the weight of public spending. This explains why French public spending scarcely declined from the 2009 peak (56.4% of GDP, down by only -0.4% compared to the 56.8% of 2009). In the rest of the EU, it fell nine times as quickly, with a 3.7% decline compared to the 50% of 2009). This out-of-step performance compared to the rest of the EU shows the magnitude of the issues in a country that is quick to stigmatise “budget austerity”, which is not part of French reality, and to underestimate the effects of a very real “tax austerity”.


French imbalances that are not associated with greater well-being It should be added that, contrary to a common view, lack of rigour in government management, such as the high level of public spending, is not necessarily associated with greater well-being. Various indicators focusing on quality of life show that the French situation is far from optimal. The United Nations ranks France 21st out of 188 countries in its Human Development Index. In the EU, seven countries that do a better job of balancing their central government books obtained better results than France. They are Germany, Denmark, the Netherlands, Ireland, Sweden, the United Kingdom and Luxembourg (Figure 7). These same countries have lower public spending than France (Figure 8) while being ranked higher by the UN in their level of human development. We hear the same story from the OECD, where the Better Life Index also shows mediocre results. The average of the various criteria put forth by the OECD puts France in 18th place out of 38 countries studied. Within the EU, 10 states get better results than France while doing a better job of balancing their central government books. They are the eight countries noted above plus Finland and Austria (Figure 9). All these countries obtain better performances with lower public spending (Figure 10). All these elements suggest that a high government deficit level and high public spending do not go hand in hand with a more attractive offering of administered services. It appears, on the contrary, that French public services are far from inexpensive.


Reading: All the countries above the horizontal grey line have a higher human development index than France, according to the UN. The countries to the right of the vertical grey line have a lower number of days of unfunded central government spending than France.

Reading: All the countries above the horizontal grey line have a higher human development index than France, according to the UN. The countries to the left of the vertical grey line have lower public spending than France as a percentage of GDP.


Reading: All the countries above the horizontal grey line have a higher Better Life Index than France, according to the OECD. The countries to the right of the vertical grey line have a lower number of days of unfunded central government spending than France.

Reading: All the countries above the horizontal grey line have a higher Better Life Index than France, according to the OECD. The countries to the left of the vertical grey line have lower public spending than France as a percentage of GDP .


Recurring deficits are worrying from an economic and societal standpoint Some people think there is not much reason to be worried by public deficits. Beyond the ample economic debate on the effects of turning to debt (Box 1), the government would be fully within its ambit in intervening on a conjectural basis to smooth the cycle or in acting structurally to finance projects that could not be conducted by the private sector. According to the theory of “automatic” stabilisers held dear in the Keynesian tradition, public actions have a smoothing effect on the economic cycle. In a recessionary phase, taxation levels would decline, supporting private income and mitigating negative fluctuations in aggregate demand. Conversely, in an expansionary phase, taxes would rise, offsetting growth in aggregate demand. Eurostat data show that this is not what has occurred in France over the last 35 years with regard to government. The data attest to a sustained imbalance in the French situation. As we saw above, the most recent balances for the central government and its various bodies date back to 1980. Since then, every fiscal year has produced imbalances. Beyond the shocks linked to cyclical jolts, the situation has gone downhill. On average, “the day when all resources have been consumed” has moved up by one-and-a-half days per year since 1980. Also, while the economic situation may explain deficits in part, it in no way justifies the absence of a return to balance in the last 35 years. Similarly, it is often argued that deficits are a necessity, to the extent that they help finance renewed public investment. Part of the government debt may be linked to the need to prepare for the future by financing projects that could not be conducted by the private sector. This analogy with the behaviour of other economic players does not seem convincing. Again, the available data do not support this view. On the one hand, the economic wealth of French government bodies is in decline. Its net worth has fallen by two-thirds since 2007. It may even have turned negative if public service pension liabilities are included (Box 2). Reality therefore differs from the image of the government as a wise investor. A valuation of government assets shows that debt is created to finance current spending, the opposite of what a wise manager would do. We should add that these deficits do not coincide with faster wealth creation than elsewhere. Indeed, overall per-capita wealth is rising far more slowly in France than in the rest of the EU. This makes it difficult to affirm that deficits and growing debt are the corollary of a long-term investment policy. If French deficits were associated with collective wealth creation, this should be visible in the numbers. The net worth of public assets should not be declining, and/or per-capita GDP should be rising significantly in the medium term.


Box 1: Public debt, risk or opportunity? Keynes, Morgenthau, Lucas, Barro, Musgrave and many other economists have debated the pros and cons of public debt quite extensively. In his book 3 controverses de la pensée économique : travail, dette, capital (Éditions Odile Jacob, 2016), economist Jean-Marc Daniel summarizes the main arguments that fuel the debate over public debt. He identifies four major arguments in the economic literature in favour of public debt: 1. When it comes to raising production, public spending is more effective than private spending.

It provides for the use of funds that private individuals did not wish to use. 2. Because public spending has a prolonged positive impact on growth, it makes sense to finance it

with borrowing that smooths the cost of spending over time. 3. The use of borrowing to finance certain public expenditures limits tax outflow and avoids private

spending being crowded out by public spending. 4. A financial situation that leads to excess savings, with the natural economic result being a current

account surplus, makes it wise to recycle these savings through public borrowing. In contrast, he identifies five major arguments against public debt: 1. Private investment is superior to public investment because, when private entrepreneurs put their

own capital into play, they are going to look twice before investing. By seeking to promote their personal income above all, they are providing a service to their country’s overall income.

2. Public investment is less efficient, because it does not incur any automatic sanction. The state may cancel part of its debt or inflate part of it away. Moreover, the distinction between good and bad investment runs up against problems of measurement, given the lack of agreement on these concepts.

3. The crowding-out effect linked to growth in public investment is permanent and inevitable. A big upswing in public investment reduces private investment opportunities, even in a context of monetary creation intended to limit the crowding-out effect.

4. Monetary creation to finance public debt has a permanent crowding-out effect, with the rise in public debt leading almost automatically to a rise in household savings, thus limiting the growth effect of public debt.

5. Public debt disrupts the operation of financial markets and the natural way of determining interest rates, and this will interfere with saving and investment flows.

To this can be added the anti-redistributive argument. As Melon and then Ricardo showed, public debt produces income transfers in society. Some people gain from this – those designated as annuitants or those who currently hold life insurance in euros – but this does not apply to everyone. In comparative terms, debt impoverishes those who lack the capacity to save. As Jean-Marc Daniel notes, “This is why left-wing parties in the 19th century demanded balanced budgets based on the need to protect the poor in future generations. Nowadays, paradoxically, especially in France, the Keynesian heritage turns some economists who claim to be on the left into systematic defenders of recovery through public spending and debt.”


Box 2: In France, is the national economic wealth still positive? The latest National economic wealth analysis produced by the INSEE (December 2016) values the wealth of public administrations at 147% of GDP. These administrations own a broad array of civil engineering structures (highways, ports, airports, etc.), land, housing, machinery and equipment, and also financial assets. To calculate net wealth, it is necessary to subtract financial liabilities, public debt in particular, amounting to 135% of GDP. French administrations’ wealth then ends up amounting to 12% of GDP. This number has fallen quickly. It has not been this low in the last 20 years and is down by nearly 80% since 2007. Not only that, but the reality is even worse since the INSEE calculations of administrations’ wealth fail to take account of all public commitments. They do not include pledges in the form of pensions for civil servants and the like. According to the Cour des comptes, these pledges amounted to 76% of GDP in 2014. This puts the administrations’ true net wealth in negative numbers, equal to -64% of GDP.


GLOSSARY The central government comprises all administrative bodies of the central government and other central bodies with jurisdiction that usually extends over the entire economic territory of a given country, apart from social security administrations. In France, this refers to the central public administrations (APUC), a concept that groups the government and its decentralized departments as well as the various central administration bodies (ODAC). This last category comprises government agencies classified as legal entities (for example, universities or employment centres). A federated state government is an autonomous institutional unit that performs certain administrative functions at a level below that of the central government but above that of local government, apart from social security administrations. This concept applies in four EU countries. Local governments cover all types of public administrations with jurisdictions extending to only part of the economic territory, apart from local branches of social security administrations. In France, this refers to local public administrations (APUL), a concept that comprises all local authorities (regions, departments, municipalities and their public inter-municipal cooperation institutions) and various bodies under local administration (for example, secondary schools, colleges and chambers of commerce). A social security administration is a central, local or federated state institutional unit that has, as its main activity, to provide social benefits and that meets the two following criteria: Certain population groups are required to participate in the plan or to make contributions under

statutory or regulatory provisions (apart from those applying to public sector employees). Regardless of the role they play as supervisory bodies or employers, public administrations are

in charge of managing these units with regard to setting or approving contributions and benefits.

In France, social security administrations (ASSO) comprise hospitals and all social security plans (basic social security plans and special plans) as well as supplementary pension plans and unemployment insurance.


DETAILS ON DATA Cour des Comptes (2016), Les pensions de retraite des fonctionnaires, des évolutions à

poursuivre – October 2016 – 197 pages. Eurostat (2017), annual series, “Government revenue, expenditure and main

aggregates” [gov_10a_main] in millions of euros, data updated on October 23, 2017. INSEE (2016), National economic wealth in 2015: A modest rebound – Insee Première No. 1626,

December 2016 – 4 pages. OECD (2016), Better Life – Data taken from www.oecdbetterlifeindex.org on July 1, 2017. United Nations Development Programme (2016), Human Development Report 2016 – 312

pages. DETAILS ON CALCULATIONS The calendar of dates on which central governments in the European Union haven spent all their annual revenue is devised by dividing the total annual revenues of central public administrations by the total expenditures of central public administrations. The result is multiplied by 365, with 365 then subtracted to express financial overruns in days over a year and to calculate the date on which government has consumed everything. This method is similar to usage in the financial sector, with analysts habitually presenting working capital requirements, for example, in days of turnover. It also has the advantage of making sense to anyone who has wondered how to make ends meet at the end of the month. Calculations are based on Eurostat’s gov_10a_main series for 2016 and previous years, with the lines “Total general government revenue” (TR) and “Total general government expenditure” (TE). The quarterly data available for the first and second quarters of 2017 have not been used. The “Quarterly non-financial accounts for general government” series (gov_10q_ggnfa) does not segregate expenditures by all central governments in the EU. Similarly, data produced in national processes are not used. The heterogeneity in the way they are presented makes any EU-wide comparison impossible. This methodological choice generates a minimal defensive calculation for France. The use of data issued in the context of the French Finance Act would have shut out an even greater number of days when the government had spent all its revenues. Eurostat records transfers to other administrations. This increases expenditures as well as revenues and reduces the number of days of unfunded spending.


CONTACT FOR ANY QUESTION OR INTERVIEW Cécile Philippe, Executive Director: [email protected] MISSION OF THE IEM The Institut économique Molinari (IEM) is a research and educational organization with the mission of promoting individual freedom and responsibility. The institute aims to facilitate change by stimulating debate on the conventional wisdom that extends the status quo. It seeks to stimulate the emergence of new consensuses by offering an economic analysis of public policy, showing the interest of exchanges and of more moderate regulation and taxation. The IEM is a non-profit organisation financed by voluntary contributions from its members: individuals, companies or foundations. Affirming its intellectual independence, it does not accept any public subsidy. www.institutmolinari.org


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