France: Welfare State Faces Fiscal Squeeze in Case of No Policy Change Under the Next French President

France’s social spending is among the highest in the world and is an important source of budget rigidity and cyclicality.

The Covid-19 crisis has further exacerbated vulnerabilities of the social-insurance system as spending on health and unemployment benefits shot up while revenue dropped. In addition, the cost of population ageing, albeit less significant than that of some other advanced economies over the long run, will structurally raise fiscal pressures, while space to increase revenue is limited by an already elevated tax burden.

Indeed, reforming the welfare state post Covid-19 will prove crucial for France’s public finance and credit outlooks (rated AA/Stable Outlook), given the former’s importance for trajectories of the budget balance and public debt (Figure 1). Here, the two presidential candidates have diverging approaches for balancing the social-security budget. Incumbent Emmanuel Macron wants to simplify the welfare payment system. Marine Le Pen believes instead that giving preference to French citizens to access the most important social benefits and cut benefits to immigrants represents a better route.

Looking at different pillars of the social security system, Scope Ratings reviewed those having an important impact on public finances (e.g., pensions, healthcare, unemployment) to highlight the main challenges ahead.

Figure 1. France’s public debt trajectory under various policy scenarios
% of GDP

France’s large welfare state shields households and businesses from external shock

The most important observation is that France’s large welfare state shields households and businesses from external shocks such as the Covid-19 pandemic crisis, but also raises crucial fiscal challenges over a long run.

The history of CADES, the state body created to pay down the country’s accumulated social-security debts in 1996, is an appropriate example, with the body’s mandate, originally set to conclude in 2024, now extended to 2033 after transfer of a further EUR 136bn in social-security debt onto its books in year 2020.

France spends more than peer countries across nearly all components of social spending, which results in elevated budgetary rigidity and sensitivity to economic shocks. Social spending totalled 31% of GDP in 2019, well above an OECD average (of 20% of GDP) and indeed the highest of OECD member states.

Social security system has been severely impacted by the Covid-19 crisis

In addition, the social security system has been severely impacted by the Covid-19 crisis. The system’s deficit reached a historic high in 2020 of 1.7% of GDP, mainly due to sudden rise of healthcare expenditure, reversing material reduction in deficits over an earlier 2011-18 period.

Long-run fiscal pressures remain a tangible risk to the trajectory of French public debt

Long-run fiscal pressures from the rise in ageing-related budget costs are lower than those of many peer advanced economies but remain a tangible risk to the trajectory of French public debt given rise of social debt.

France’s pension, healthcare and unemployment insurance systems result in strong social outcomes for the elderly at, however, a significant financial cost. Reforming said systems to address inefficiencies and enhance fiscal sustainability is crucial as regards France’s credit outlook, particularly because the country’s high tax burden curtails government capacity to address budgetary pressure via additional tax revenue.

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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Senior Analyst at Scope Ratings, contributed to writing this commentary.