Debt Sustainability of France: Provision of Services (Essay Sample)

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Debt Sustainability of France
In measuring the financial status of a country, solvency is an important indicator. Solvency indicates the amount of money that a country has at its disposal to fund the provision of services within the state (Eichengreen, 1991). As a result, solvency is important in measuring the financial stability of a country. In macroeconomics, many factors affect the stability of a country. However, international debt is one of the most important factors to consider. States take on foreign obligations either from other countries or international organizations to fund different projects or to finance their budgets in times of financial turmoil. The lenders of this money provide the countries with loans at certain interest rates. A subsequently, for the country in debt to remain financially solvent, it has to raise enough money to finance paying the debt and still leave enough money to finance its budget (Hume, 2012).
National governments require revenue for different purposes. The primary purpose of any government is the provision of services (Della Croce and Gatti, 2014). Some of the services that the governments are tasked with providing include health services, emergency services, and education services. The government requires finances to provide such services. For example, in medical service provision, the government needs money to pay the medical personnel, purchase medical equipment and additional emergency gear such as ambulances, construct more hospitals and purchase medical supplies such as medicine. For such services to be successful, the government must have a means of generating finance to support the services. Since the government provides these services to its citizenry, it requires its citizens to pay a given percentage of their incomes as taxes. Furthermore, the government also imposes taxes on businesses within the country. Such companies can either be locally owned or international businesses.
National governments use taxes as their primary source of capital. Therefore, for states to generate enough capital to finance their budgets and pay foreign debts, they consider two options. The first option is raising tax rates. Increasing the tax burden on the citizens means that the country would require the citizens and local organizations to pay higher levels of taxes to the government. For example, a state could increase the percentage of taxes from 30% of the GDP to 35%. Such an increase implies that 35% of all local economic production diverts to the government as tax, and the government uses such taxes to pay off international debts and to finance the provision of local services. On the other hand, the government can opt to retain the current rates of taxation and cut down on expenditure. The government would then use the surplus money generated to pay international debts.
The debt to GDP ratio stood at 88:100 in 2012. In 1995, the ratio stood at 55:100. Over this 18 year period, the rate fluctuated but experienced a rising trend. Indeed, the debt to GDP ratio in the course of the 18years did not fall below the 55:100 that the country recorded in 1995. Furthermore, the ratio had been on a sharp increase since 2005 when the it dropped to 64% from the 66% rate that the country recorded in 2004. Two possible causes can explain the increasing trend. Firstly, it is possible that the French government has increased its international trends to finance its economic development. Secondly, it is possible that the French economy has been on a decline leading to lower production regarding GDP which the country’s international debt remained relatively constant. Both of the above cases indicate poor performance and the trend is not sustainable. It is important for the government of France to institute measures to ensure a decline in the trend.
International debt has crippled France for a long period. While France had a booming GDP for many centuries which led the country to rise to a developed country status, international debt slowed this rate. The country took on international debts to finance investments both locally and internationally. However, these investments, in some case did not generate sufficient revenue to warrant the level of investment. In addition, the government did not generate enough revenue to settle the international debts. As a result, there is a need to implement new policies to boost revenue generation within the country.
For France, statistics indicate a rising trend of government debts as a percentage of the GDP. For example, in 1995, this rate stood at 55% while, in 2012, the ratio stood at approximately 88%. An 88% government debt to GDP ratio means that if the government were to divert 88% of the country’s GDP in a given fiscal year towards settling of international debt, the government would have paid all its foreign debts. However, only a percentage of this GDP is available to the government in the form of taxes, and the government has to split this available amount between debt payment and provision of services within the country. Subsequently, the government has to pay such debts over an extended period as it only pays a small percentage of the debts in a given year. Furthermore, the debt payment period could become even more prolonged as during periods of poor economic performance, the government often opts to pay off only the interest amount to prevent the principle amount of the loan from increasing. Therefore, in times of good economic performance, the government can opt to pay higher amounts of money to the lenders to supplement for any future or past deficits where the government had paid or would have paid only the interest amount. Furthermore, the amount of public debt is likely to increase in future to help the government finance future projects where the government revenues are not sufficient to fund such projects.
Statistics show that the French government’s deficit as a percentage of the GDP fell between 1995 and 2012. In 1995, the ratio stood at -5.5% which fell to -4.2% in 2012. Better economic performance and increased efficiency in tax collection are possible reasons which can explain this deficit decrease. However, reduced government expenditure on local projects and service provision can also explain the reduction in the deficit. The reduced deficit is an important statistic for the French government. This reduced deficit indicates that the French government has more finance at its disposal to pay international debts.
To successfully be in a position to fund the paying of these debts without incurring further international debts, the government needs to reduce the deficit below 0%. This means that the government would have to find a means to convert the current deficit to a government surplus. A general government surplus means that the government records higher revenues collected than expenditures. Therefore, the government would have extra money than it would need to satisfy its uses. A general government surplus is essential if the French government is to settle all its international debts because of two reasons.
Firstly, the French government would use the excess amounts to pay international debts. Since the government does not use the excess revenue in any of its local or international projects, the government would use this money to reduce the principle amount collected in debts. Furthermore, the government would not need to take on more foreign debts to finance different projects. For example, the French government has incurred significant amounts of debt in the past two decades amounting to 88% of its debts. Paying off the interest alone causes a great quantity of strain on the government revenues. However, since the government aims at eliminating all of its international debt, it pays the annual interest amounts plus a proportion of the principle amount. The amount at the disposal of the government is not sufficient to cater for these expenditures, finance different projects within the country and finance provision of social services within the country. Subsequently, to supplement the revenue amount that is at its disposal, the government takes on more international debts. Such a trend is what has enormously contributed to the high level of foreign debt within France and the rising trend in the level of international debt. A net general government surplus is important in reversing this trend. The surplus means that the government would have enough money at its disposal to finance paying off the debt installments, fund projects within the country and providing services within the country and still have enough revenue left for additional uses.
As previously indicated, the French government can use two means to ensure that it records a general government surplus. The first method would be to reduce the government expenditure. Such a process would involve cutting down on the amount of money that the government uses to finance local projects and to provide services within the country (Blundell-Wignall, 2012). However, this process would have detrimental effects on the economic well-being of France. The government would provide lower quality services to the citizens. The lower services would translate into lower standards of living. For example, cutting down on government expenditure on medical care provision would result in the construction of fewer hospitals, reduced salaries for doctors, unavailability of emergency medical services and lack of medical supplies such as medicine within the government hospitals. On the other hand, reducing the amount that the government uses to fund local projects would also lead to poor economic performance by the government (Andreas, Storesletten & Zilibotti, 2016). For example, if the government reduces the amount that it uses to fund construction projects such as road...