Summary:
- France presents its 2020 budget with abundant tax cuts
- The budget has been built on an assumption of only tiny growth deceleration
- Expansionary monetary policy has made taking on new debt much more attractive
It has not been the first time when Germany is urged to loosen its purse strings in order to shore up its flagging economy. Voice came from France this time round where we were offered a 2020 budget yesterday. Overall, the French government expects quite abundant tax cuts which are expected to amount 1 billion EUR for business and up to 9 billion EUR for households. As a result of these steps, the next year's budget deficit is expected to amount 2.2% of GDP, down from 3.1% projected for this year as the country was affected by yellow-vest protests. In turn, the structural deficit, which excludes the impact of the economic cycle and other one-offs, is expected to stay broadly unchanged at 2.2%. However, the budget has been built on quite a demanding assumption of an economic growth deceleration only to 1.3% from 1.4% projected this year. In our view, this poses a downside risk for this budget meaning the country could see its next year's budget gap even closer to 3%.
On top of that, France, which does not seem to have more fiscal space, has urged Germany to follow its footsteps with fiscal stimulus in order to boost economic growth. French finance minister Bruno Le Maire said that the latest ECB’s steps created an opportunity for governments to take on new debt. Moreover, he added that “Germany needs to invest and to invest now, the sooner the better. Let’s not wait for the situation to get worse,”. Let us notice that France is among EU countries having the least fiscal space to boost spending given its 3% general government deficit as well as public debt hovering around 100% of domestic output. At the same time, we think that countries like Germany, the Netherlands and Austria hold the largest fiscal buffer, hence these countries should among the leaders preventing a deeper economic downturn.
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Germany has its yield curve below the zero line while France could borrow at no cost up to 15 years. Source: Bloomberg
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