Policy brief

Reducing the Weight of Public Spending: Lessons from European Countries

At 56.4% of GDP in 2017, public expenditures in France are the highest in the European Union and 10 percentage points above the European average. A high level of public spending is not a problem in itself, as it can mostly reflect different choices in the socialization of certain types of spending (pensions, healthcare, education, etc.).

Published on : 24/05/2018

Temps de lecture

2 minutes

 It can become a problem, however, when high public spending reflects inefficient public policies, when revenues cannot be increased to balance the budget, thereby putting debt sustainability at risk, or when the level of public spending limits the space available to respond to large macroeconomic shocks.

For all of these reasons there is no alternative to France gradually reducing the weight of public expenditures. But it needs a clear objective: assuming the economy grows at its potential rate in the medium term, reducing the structural ratio of public expenditures by 3 percentage points would constitute a reasonable target and would amount to stabilizing the level of public spending in real terms over the period. Meeting this objective would improve debt sustainability and create enough room to improve France’s attractiveness by lowering the tax burden. If the ongoing phase of economic expansion persists, the ratio of public expenditures to GDP would be reduced even more sharply – by 5 percentage points in total over the next five years.

Reducing the structural ratio of public expenditures by 3 percentage points over a five-year horizon is not unprecedented: over the past twenty years, almost all European countries – save Belgium, Denmark, France and Italy – have managed to do it at least once, including in periods of moderate growth, and without necessarily having been forced to do so in the midst of a crisis.

These episodes of expenditure consolidation show that there is no single recipe for reducing public spending: different countries make different choices in the composition of adjustment, reflecting inefficiencies and national preferences that are specific to individual countries. There are two interesting observations to be made, however. First, excluding expenditure consolidations that took place against the backdrop of a severe crisis, cuts to the public payroll and social transfers (including tax credits) were particularly large. Second, the largest adjustments (Sweden and Finland) were accompanied by wide-ranging reforms of the public sphere and an overhaul of budgetary processes.

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Reducing the Weight of Public Spending: Lessons from European Countries

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