Where does the rule limiting the public deficit to 3% of GDP come from?

The public deficit is expected to reach 5.6% of gross domestic product (GDP) in 2024 and could rise to 6.2% in 2025, according to forecasts by the French Treasury. These figures are far from the 3% deficit required by the European Union, which led to France being subjected to an excessive deficit procedure.

Why are deficits and debt regulated by European treaties?

In 1992, the Maastricht Treaty established “convergence criteria” to bring the economies of the Member States of the European Union (EU) closer together, with the aim of adopting the euro as a single currency and creating the Economic and Monetary Union. The control of public finances becomes a key point of the treaty, which then sets maximum limits: the deficit, at 3% of GDP, and the debt, at 60% of GDP.

Four years later, the Stability and Growth Pact must ensure that the rules are respected once countries actually join the eurozone. A procedure then requires member states to submit their budgetary targets each year, which entails possible financial sanctions in the event of excessive deficits.

Where do these limits come from?

The origin of the 3% is, to say the least, surprising. In 1981, public spending in France soared. The President of the Republic, François Mitterrand, sought to avoid an increase in public debt, which increased as deficits piled up. Then three senior French officials came up with a threshold. “We look at the latest GDP forecasts projected by INSEE for 1982. We enter into our calculator the spectrum of a deficit of 100 billion (…). The ratio of both is not far from giving 3%”said Guy Abeille, former project director at the French Ministry of Finance, in 2010 The tribune.

This figure was established in the French economy and then extended its influence to the European Union. It was Germany that asked the EU to establish a deficit rule. When the Maastricht Treaty was signed, the 3% ceiling was also used as a basis for calculating the maximum level of public debt. A deficit of 3% of GDP made it possible to stabilise debt at 60% of GDP, taking into account the 5% growth of GDP in value then expected in Europe. Although these limits have no real economic justification, they remain valid even today.

Are these rules respected?

For more than twenty years, EU member states have generally shown discipline with regard to the 3% rule, unlike France. Between 2002 and 2005, France consistently recorded deficits above 3% of GDP, as well as between 2007 and 2017. In 2018, its deficit fell back below 3% and fell again in 2020.

Within the Union, the only breaches of the ceilings were observed during the 2008 and Covid-19 crises. The 2020 pandemic and then the Russian invasion of Ukraine in 2022 significantly increased the deficit and debt of EU member countries. Then, in 2020, the European Commission activated a derogation clause to temporarily suspend the application of budgetary rules by Member States; it was extended for three consecutive years.

The public debt of States has been falling since 2021 with the end of the Covid-19 crisis, a trend that continued until 2023. The increase in GDP, but also inflation, which inflates tax revenues and reduces the ratio of debt to GDP, partly explain this general decline.

Six EU countries still have debts exceeding 90% of their GDP. Greece in particular has a ratio of 161.9%. France is in third place after Italy, with 110.6% of debt (or more than 3.101 billion euros).

Are these rules immutable?

These numerical standards are not unanimous within the EU. They are divided between those who defend the budgetary guidelines given to member states and those who consider them arbitrary and say nothing about either the type of spending undertaken for the deficit or the sustainability of the debt. In 2021, the Council of Economic Analysis, a think tank attached to Matignon, suggested abandoning the common 3% deficit target and replacing the 60% debt threshold with a different ceiling for each country.

The European Union has also noted its inapplicability and even its ineffectiveness. However, the new version of the Stability and Growth Pact, adopted in April 2024, maintains these limits as they are. This reform rather aims to modify the room for manoeuvre of the Member States by creating new budgetary rules intended to be more flexible. The States now have a period of four years to achieve the objectives, extendable to seven years, but within a very precise framework consisting of reducing a public deficit of more than 3% during a period of growth to reach 1.5%, with the aim of creating reserves. The excess debt must be reduced by 1% per year on average if it is more than 90% of GDP, and by 0.5% if it is between 60 and 90% of GDP.

If a Member State subject to the excessive deficit procedure fails to comply with its obligations, it may be subject to sanctions. So far, no Member State has actually been sanctioned for exceeding its deficit or debt ceiling. The reform is supposed to make these sanctions less severe but more effective. Currently, fines amount to 0.05% of GDP and are accumulated every six months.

Is it possible to return to a 3% deficit in France?

Since July, several Member States have been subject to an excessive deficit procedure: Italy, Belgium, Hungary, Poland, Slovakia, Malta, Romania and France.

Like the others, France must submit to Brussels by 20 September its plan to reduce the public deficit until 2027, when the country must return to the deficit level of 3%. But the forecasts do not point in that direction. The increase in community spending combined with the fall in tax revenues could lead to a deficit of 5.6% by 2024. Worse still, in 2025 the deficit could rise to 6.2%.

For France, “a return of the deficit below 3% by 2027”as required by the Stability and Growth Pact, “would require savings of around 110 billion”The Treasury’s general directorate warned in a note in July. The current political situation also risks influencing the approval of the 2025 budget. At the beginning of September, France asked Brussels to give it more time to submit its plan to reduce the public deficit.