French central bank chief calls for spending cuts

10 Jul 20

France must look to spending cuts rather than tax increases to help cap public debt during its economic recovery from the pandemic, the country’s central bank head has said.


In his annual letter to the president, Banque de France governor François Villeroy said public debt is expected to reach 120% of GDP by the end of 2020, and that “collective wisdom” would recommend not allowing it to increase.

He warned of a “slide” towards southern Europe, where debt is generally higher than in the continent’s more fiscally conservative north.

“It is ultimately on our debt level that France’s status in Europe will play out,” he said.

“In 20 years, the weight of French debt in relation to GDP will have doubled, going from 60%... to 120%.

“During the 2009 crisis, we were still on the same level as Germany. But since then, French debt has increased significantly faster (+36% of GDP) than the euro area average.”

But to do this, Villeroy told the president that the French government must not increase taxes, fearing the economic impact it could have.

Many households saved money while the country was in lockdown and high-street businesses were closed – and Villeroy warned that these savings risked being hoarded if people fear tax hikes or unemployment.

“We must therefore first rule out the recessive effect of tax increases on households, and not reproduce the error made by a certain number of European countries, including France, after the 2011 crisis, of raising tax rates too quickly, and risk stifling the recovery,” he said in his letter.

“It could be a guarantee of fiscal stability over several years: France also does not have the means to finance further tax cuts, after those initiated in recent years.”

He added that “significant” unemployment benefits and training programmes must be maintained to help ease people’s fears and encourage them to spend their “enforced” savings made during lockdown.

Read more: French state auditor calls for review of public spending post-pandemic

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