France’s budgetary position is disastrous, and the country appears to be moving inexorably towards a fiscal crisis like that which brought Greece to its knees over a decade ago. The land of Molière presents one of the extreme cases of failure to implement fiscal consolidation after the large-scale fiscal stimulus during the COVID-19 pandemic. But the problem is not new. Successive French governments have for decades failed to contain the upward trajectory of public debt.
The reason for France’s chronic fiscal incontinence is first and foremost political, lying in the scale of popular resistance to any significant cut to government expenditure. But does the budgeting system also play a role? This is a question that the French supreme audit institution – the Cour des Comptes (CdC) – set out to answer in a recent report on The Preparation and Execution of the State Budget. The report is excellent, and presents lessons that are highly relevant to other countries. However — as discussed below — one of its main recommendations is open to debate.
The CdC zeros in on the absence of a sufficiently top-down budgeting system. In other words, the French budget preparation process is not adequately designed to ensure that annual budgets respect aggregate expenditure ceilings. More specifically, it is not sufficiently focused on the identification and management of available fiscal space*.
A key problem here, according to the CdC analysis, is the failure to reliably determine the expenditure baseline early in the budget preparation process. This reflects in part the lack of a sufficiently well-established baseline estimation methodology. But it also results from the fact that, although the baseline is in principle supposed to be worked out in the first stage of the French budget preparation process (the “preparatory” stage), in practice spending ministries are allowed to continue to debate the baseline – and to take these debates to the political level – during the next (“arbitrage”) stage when the focus is supposed to be exclusively on the allocation of available fiscal space.
The CdC also finds that the budgeting system has been ineffective in identifying and implementing savings in baseline expenditure. It acknowledges here that the government in 2023 introduced a new spending review mechanism which explicitly aims to identify major savings options, and which in principle covers all government expenditure. However, this new spending review system suffers, in the CdC’s view, from major institutional defects — including a lack of leadership at the top political level, bureaucratic separation from the budget directorate, and insufficient integration with the budget calendar.
Overall, the CdC considers the French budget system to be too bottom-up. There are insufficient constraints on spending ministries proposing new spending, and a lack of incentives for cooperative behavior from ministries in achieving overall government fiscal objectives.
The report makes a range of valuable recommendations to address these problems. These include action to ensure that in future the estimation of the baseline is completed in the first stage of the budget preparation process, so that the process can then move on to focus on the allocation of fiscal space available in the context of strict respect for the aggregate expenditure ceiling. This accords with what would be widely acknowledged as good top-down budgeting practice.
So far so good. The CdC goes, however, one step further and argues that ministry expenditure ceilings should be set early in the budget preparation process. It finds fault with the fact that spending ministry ceilings are not set in the budget framework letter (“lettre de cadrage” – approximately speaking, the budget call circular) that is issued to spending ministries by the Prime Minister at the end of the “preparatory” stage of the budget preparation process. The headline recommendation of the report is that the budget framework letter should henceforth include ceilings for each spending ministry.
To understand the significance of this recommendation, the thing to bear in mind is that it is only in the subsequent (“arbitrage”) stage of the process that spending ministry proposals for new spending are supposed to be discussed. In essence, then, the CdC is proposing that ministry ceilings should be set prior to the formal discussion of new spending proposals.
This recommendation reflects the influence of the “hard ministry ceilings” (HMC) doctrine which I have previously critiqued at length. HMC asserts that the appropriate way of enforcing aggregate expenditure ceilings is to split them into ministry ceilings in the budget call circular before spending ministries are permitted to formally present new spending proposals (or savings proposals, for that matter). In its pure form, this doctrine further demands that these ceilings should be hard, with spending ministries under no circumstances being granted additional funds during the rest of the executive budget preparation process. This tough approach is, it is claimed, the best way to contain excessive bottom-up spending pressures.
The HMC doctrine has many flaws. Perhaps the most important is that setting hard ceilings without any prior formal consideration of new spending proposals would undermine the basic budgeting objective of rational resource allocation (allocative efficiency).
Perhaps aware of this problem, the CdC shies away from the pure version of HMC by recommending that what the PM’s budget framework letter should contain are what it calls “pre-ceilings” (pré-plafonds) for each ministry. While no definition of “pre-ceilings” is provided, the only possible interpretation of the CdC’s line of argument is that it means ceilings which can be varied during the later stages of the budget preparation process.
The obvious difficulty with this is that a “ceiling” which can subsequently be varied is no ceiling at all, and cannot serve the function of enforcing expenditure discipline.
The CdC suggests that what is it proposing is standard practice elsewhere, citing Sweden as an example. However, most advanced countries do not set ministry ceilings at an early stage of the budget process. Moreover, although Sweden and a few other countries (e.g. Germany) set early ministry ceilings**, none of these countries (to the best of my knowledge) set these ministry ceilings without having first permitted spending ministries to formally present new spending proposals and have these properly discussed. To be able to set these ministry ceilings early, they have created processes to negotiate major new spending proposals even earlier in the budget preparation process.
If France were to follow the lead of Sweden and Germany and set ministry ceilings at an early stage of the budget preparation process, it would have to bring forward the presentation and negotiation of new spending proposals to an even earlier stage, prior to the setting of these ministry ceilings. The problem here is that in a top-down budgeting system decisions on new spending proposals cannot be made without first determining baselines and estimating available fiscal space. It is only because they have the technical capacity to determine the baseline right at the outset of the budget preparation process that countries like Sweden and Germany can move at such an early stage to set ministry ceilings. This is something which the CdC analysis indicates that France is currently unable to do, and is unlikely to be able to for some years to come. It follows that the CdC recommendation for the early setting of ministry ceilings in France is impractical at present.
Be this as it may, the Cour des Comptes report is excellent and offers much in the way of technical tools to help France restore order to its public finances. Regrettably, however, technical solutions cannot resolve the underlying political problem.
* Recall that fiscal space – the “marge de manoeuvre” as the French call it – is the difference between the aggregate expenditure ceiling and baseline expenditure.
** In Sweden’s case, “expenditure area” ceilings.
Note: France also sets supposedly fixed two-year ceilings for multi-ministry policy areas (“missions”), but as the CdC points out these are not binding on the annual budget and have frequently been exceeded.