Do You Weigh More Before You Poop?

France will she fail?

Yesterday, looking in my mailbox, and finding there for the first time, a promotional copy of Current Values , I told myself that I had committed a serious error in my life, to be included in the listing and potential clients of this magazine.

But my meditation on my life was brutally interrupted by reading the title of the cover (" government deficits: explosion ") and this assertion :

The warning is clear: without a drastic austerity budget, there is now a real risk of state failure.

I am immediately reassured: Since we've announced, the Apocalypse did not happen and I no doubt politically motivated inherent in this kind of talk.

But, on the other hand, is correct that the current crisis leads to a sharp increase in public debt. In only two quarters of 2009, public debt has increased 6 points of GDP, reaching 74%. It will probably be 77% at the end of the year, against 67% a year earlier. If one follows the latest IMF forecasts, the debt will reach the same 92.6% of GDP in 2014. Under these conditions, the French state will he go bankrupt?

The answer is: there is not any risk of this happening. With any luck, this increase in debt will occur even without pain.

A borrower goes bankrupt when no longer able to meet its commitments. However, the state has an important property as borrower, which distinguishes it from private borrowers: it can simply do not repay the interest on its debt and never the principal. It is indeed eternal, and nobody asked him to repay at some point all of its debt, lest he die without having paid. In fact, the French state has not repaid the principal for over 30 years. The true measure of the ability of the French state to meet its deadlines is constituted by the high interest payments as a proportion of revenue: there will bankrupt the day when the state can no longer finance its expenditure because part too important (but difficult to determine precisely) its revenue will rise in interest payments due.

It was very far at that time (2006-2008) of hysterical debate on public debt. At that time, the proportion of interest payments relative to government revenue was even lower in 20 years, just over 5% in 2006. Representing 2.6% of GDP.

The French government was far from bankruptcy, since it uses only 5.3% of its revenues to pay its creditors, or 2.6% of GDP. It is true that 2.6% of GDP were not allocated to build schools or hospitals, but we see immediately the weight certainly not negligible but in the end that these payments were limited influence on policy.

But what will he in 2014 when the debt will represent 92.6% of GDP? The answer is that we can not know exactly, since this will depend on the evolution of interest rate refinancing the state, which depends on the average interest rate it pays on its debt. The average interest rate on government debt in 2008 was 4.15%. Since interest rates on government securities have fallen sharply : they are the same well below 4% if the government borrows less than 20 years.

It is therefore reasonable to hypothesize that the state will pay on average about 4% interest on its debt. With this assumption, an immediate calculation shows that a 25 point increase in GDP of public debt will result in an increase of 1 percentage point of GDP in interest payments of debt (25 x 0.04).

In the end, the French state will not fit into the unknown prior to bankruptcy: the interest payments will be in proportion to GDP, only slightly higher its historical peak of the postwar period: 3.7% in 2014 against 3.6% in 1996. At the time, this represented 7.1% of revenue: not exactly the situation of a borrower about to go bankrupt, or even an unbearable burden for the prosecution.

Bankruptcy seems even less likely that since 1996, government revenue, in proportion to GDP, fell.

Between 2006 and 2008 alone, revenues fell by 1 percentage point of GDP: exactly what it will find in addition to paying interest in 2014.

But should the government increase the levies mandatory. Gordon Brown has done in the United Kingdom, by passing the top of the income tax from 40% to 50%. Obama is about to make the United States. For France, this increase is moderate after all: it would suffice to find the level prior to the election of N. Sarkozy. It is in this sense that the increase in public debt can be done with a bit of luck, without pain: as far as N. Sarkozy to reverse his tax shield, and as long as interest rates do not increase. First

fragility of the scenario: the evolution of rates. If they rise, the interest payments can become really important. If we assume a slightly less optimistic average rate of 4.5% instead of 4%, interest payments represent a much more significant revenue-although we are still far from bankruptcy.

But the real danger lies elsewhere: if N Sarkozy increases the tax burden, he will finish the TEPA, and the fundamental objective of most of the French right: tax cuts. Plus: this would be a serious political defeat for Sarkozy, who has identified his share to this decline. Yet it is exactly what the economic logic application that has always led to tax increases after an increase in debt due to exceptional circumstances.

It is therefore expected that any other route is chosen: the reduction of public spending, excluding interest payments. In calling for "drastic policy of fiscal austerity" is exactly what demand Current , whose readers are not ready to agree to pass the tax shield, even as it denies them havens. In the meantime, I'm left to hope that the magazine conducts a "drastic austerity policy its advertising budget "and I shall remove from its listings.