Posted by Marc Robinson
There is, surely, general agreement among experts on the seriousness of the debt problem facing Europe at the present time? Well, perhaps not—at least not in France. Take, for example, the view expressed recently by Henri Sterdyniak, a senior economist with the respected Observatoire français des conjonctures économiques. “French public debt,” Sterdyniak claims, “isn’t particularly high…at the end of 2007, net debt was 34.4% of GDP, below the level of Germany.”[1]
What? No debt problem in France? Debt of only 34.4% prior to the crisis? Aren’t the conventionally quoted figures more than twice that level (i.e., around 64% in 2007)?
Sterdyniak’s claims rest on the use of the net debt figure, rather than the gross debt figures more commonly used in Europe. He is not alone among French economists in arguing that, once one shifts from a misleading focus on gross debt, the debt problem largely disappears.[2]
In principle, Sterdyniak is right to argue for the use of net rather than gross debt data. In practice, however, the data he quotes is profoundly misleading because it is incomplete in that it omits a key liability of the French state. Measuring net debt properly yields a figure well over twice Sterdyniak’s figure and, indeed, higher than conventionally reported gross debt.
There is no perfect debt measure. However, as I have myself argued, [3] the best single measure for fiscal sustainability purposed is net financial liabilities, equal to total financial assets minus total financial liabilities. This concept is an integral part of the IMF’s GFS accrual financial reporting framework.[4] In principle, this is exactly the measure which Sterdyniak uses. The data he draws on is regularly reported by the OECD, which uses the term “net debt” as shorthand for net financial liabilities.
The problem here is that the OECD’s data is incomplete because, in the case of France and most European countries, it does not count government pension liabilities to public employees. These are a quasi-debt liability which the IMF’s GFS explicitly recognizes should be included in net financial liabilities, but which the European System of Accounts inappropriately excludes. What would be the reaction to a private corporation excluding such a liability from its balance sheet?
The difference this makes in France is enormous. The 2008 government accounts estimate the employee pension liability (as an off-balance-sheet item) at an astonishing €1.05 trillion, equal to 54% of GDP.[5] Moreover—as the analysis of the Pébereau commission report of 2005[6] suggested—the official figures may well significantly underestimate these liabilities. But just including the official estimate gives a net debt figure of over 80% in 2007, before the crisis pushed the figure up by at least 15 %.[7] Including employee liabilities must also greatly affect comparisons with other countries, since the French public employment accounts for a larger proportion of the workforce than in most comparable countries.
Fiscal sustainability is today a profound challenge across much of the world. In France and a number of other European countries, debt was too high even before the crisis greatly aggravated both debt levels and the structural budget balance. Ignoring part of the data to pretend that the problem does not exist does not help the public debate.
Marc Robinson is a former FAD staff member who is now an independent consultant. His website is www.pfmresults.com
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[1] OFCE (2009), "L’économie française 2010”, La Découverte, Paris, p. 103.
[2] See, for example, Philippe Brossard "La dette publique : où est le problème?", LeMonde.fr, 25 April 2008.
[3] M. Robinson, “Accrual Budgeting and Fiscal Policy”, OECD Journal on Budgeting, 9(1), 2009. Downloadable in IMF Working Paper version at www.pfmresults.com.
[4] In the form of “net financial worth”, which is financial assets minus financial liabilities.
[5] Compte général de l’Etat 2008, p. 216.
[6] Rompre avec la facilité de la dette, Rapport officiel de la commission présidée par Michel Pébereau, 2005.
[7] IMF, The State of Public Finances: A Cross-Country Fiscal Monitor, November 2009.
