By Pictet AM

By the end of the month, France will have to submit its budget to the European Commission. It doesn’t look good. The budget deficit for 2024, which was forecast at 4.9% of GDP just a few months ago, is now expected to rise to 5.6% of GDP. The cause: an unanticipated drop in revenues (VAT, IR, IS), notably linked to the decline in imports.

Is this an accident? No, last year the government’s forecasts had already proved wrong. We’re clearly facing a political problem of optimistic expectations. Unfortunately, this is going to cost us dearly. The budgetary adjustment demanded by the European authorities can only be brutal.

Increased taxation seems less and less avoidable. Naturally, the public debate is turning to the idea of raising taxes on the wealthiest. Even if it means increasing the perception that only a minority contribute? Nationally, 76% of income tax revenues are paid by the wealthiest 10% of households. It would be difficult to increase the tax burden on these taxpayers any further. As always, the structural solution is to review the scope of the State, drastically cut public spending and focus State missions on certain priority areas, such as boosting productivity.

Outlook

It’s a busy week. The first debate between K. Harris and D. Trump is scheduled for tomorrow. Two diametrically opposed visions of society. Harris’s vice-presidential candidate, T. Walz, argues for a “garden economy”. garden economy “(as opposed to the jungle economy “that Trump would like). According to Walz (2018), “the idea that you are somehow more fiscally responsible by NOT investing in education, health care and transportation is a seductive political argument, but it makes no sense. Especially when we could have a better-educated, healthier, longer-living workforce etc.”. In short, he’s arguing for a form of European-style social democracy, which has never managed to take root on the other side of the Atlantic. At this stage, it’s obviously hard to say who will win. Harris is slightly ahead in the latest projections…but the gap is still too small to guarantee him victory.

In our view, no matter who wins, certain characteristics of the US economy are unlikely to change: high deficit (around 5% of GDP), high labor immigration, lack of political consensus for a massive stimulus package (there will be no Chips Act II), and recourse to protectionism and economic sanctions. Around a third of countries are currently subject to US economic sanctions. That’s a lot!

In terms of statistics, the European Central Bank is set to cut its key interest rate by a further 25 basis points – this has already been factored into market prices.