France: Government launches supply-side oriented recovery package
On 3 September, the government unveiled the details of its EUR 100 billion (around 4.0% of GDP) recovery package aiming to revive the French economy from the blow dealt by the Covid-19 pandemic and associated lockdown measures, which led to a sharp contraction in the first half of 2020 (Q1: -5.9% seasonally-adjusted quarter-on-quarter, Q2: -13.8% s.a. qoq). The new package—which adds to the fiscal stimulus of EUR 170 billion adopted earlier this year (excluding the EUR 300 billion state-guaranteed credit lines)—targets GDP to return to pre-crisis levels by 2022 and aims to increase growth potential within the next ten years. It focuses on boosting supply rather than stimulating demand, which is raising some concerns that the measures could take time to translate into higher growth.
The budget is divided roughly equally between three main areas: competitiveness, green investment and social cohesion. The government intends to strengthen firms’ competitiveness by reducing production taxes, providing equity support for small- and medium-sized businesses in order to limit the number of bankruptcies, and incentivizing entrepreneurs to relocate their production to France. Moreover, the measures aim to promote the ecological transition through funding for investment in green energy, infrastructure and technology. Lastly, the government plans to bolster employment, by providing subsidies for creating jobs for young people and extending the short-term work scheme to allow for long-term part-time activity.
Although the ambitious recovery package will boost investment and thus strengthen the supply side of the economy, its effect on growth may not be felt immediately. As Daniela Ordonez, chief French economist at Oxford Economics, comments:
“While the supply-oriented package is well-aligned with President Macron’s initial ambitions of transforming France into a more competitive nation – and might be positive for potential growth in the long-term – we think the lack of demand-support measures makes the package ill-suited to address the current shock.”
Moreover, according to Charlotte de Montpellier, economist at ING, concentrating the stimulus on long-term measures could also be politically risky with regard to the 2022 presidential elections:
“Indeed, by focusing on the long term, there is a risk that the benefits of the recovery plan will not be sufficiently felt by the population by the time of the elections. The challenge for the government will therefore be to ensure that the amounts announced are quickly spent on businesses (in particular through administrative simplification), so that the effects are tangible as soon as possible.”
Lastly, on the outlook for public finances, analysts at Goldman Sachs reflected:
“First, we think that the cost of some measures released yesterday are underestimated (in particular the cost of the long-term part-time employment scheme). Second, we continue to foresee as possible an additional tax cut on household income in the course of 2021 to boost consumer confidence and encourage households to reduce their already high saving rate (currently at 20% of disposable income on average). All in all, we thus keep broadly unchanged our forecasts for the French public deficit, to 9.0% and 6.6% of GDP in 2021 and 2022.”