Long abstract

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The recession should be less deep than elsewhere, due inter alia to powerful automatic stabilisers. However, while the finances of big banks and households do not appear to be in as bad shape as they are in several other countries, the capacity of the French private sector to revive activity in advance of a global recovery is limited. Moreover, given the already high deficit and debt levels, the crisis will leave public finances in a serious condition. In this context, the principal short-term challenge is to pull the economy out of recession, while avoiding as far as possible recourse to budgetary measures that would be difficult to undo later. The recovery plan adopted at the beginning of the year meets many of these conditions, although the impact of certain measures will not be felt until the second half of 2009, at the earliest. If a further series of actions is deemed necessary, however, it will be more difficult to employ the same kind of self-reversing provisions targeted at business investment and cash flow.
Once the recovery is well underway, it will be necessary to urgently implement a programme for reducing the public deficit, consistent with obligations under the Stability and Growth Pact. A credible consolidation strategy will be especially important because of ongoing pressures on the Social Security accounts, which, in light of demographic trends, are likely to intensify. Given the already very high level of taxes and compulsory contributions, the effort to clean up public finances will have to rely essentially on government spending cuts. In order to control public spending more effectively, the General Policy Review (RGPP) applied to central government outlays will need to strive for more ambitious results. There are substantial potential savings in fields that the Review has not yet fully explored, i.e. Social Security and local government.