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Can France finance the transition only with budget savings?

8 June 2023 - Blog post - By : Damien DEMAILLY

How does the government plan to finance the increase in its public spending on climate action? Further to the government’s reactions to the Pisani-Ferry report, which proposes using all options, including debt and tax increases, let us make an assumption: what if the government were to rely solely on budget saving options? I4CE‘s Damien Demailly reviews the savings options available to the government. Clearly, they are all difficult to implement and some may prove counterproductive. They are nevertheless on the government’s agenda and are worth explaining and discussing, as are all options to finance the transition.


The report by Jean Pisani-Ferry and Selma Mahfouz made headlines last week. It estimated the amount of additional public and private investment needed for climate action until 2030 at 66 billion euros. From this, it derived the additional public spending to be allocated to the climate transition by the state and, too often overlooked, the local authorities: just under half of this investment, or around 30 billion euros.


If the report made the headlines, it is also largely – and mainly – because it proposed financing this public spending using the three options available to the government: budget savings, debt and tax increases, especially with the shock proposal to temporarily increase taxes on the financial assets of the wealthiest. The members of the government reacted, with some differences of opinion. A clear trend emerged: the focus (sole focus for some) is on budget savings.


Let us take this as a working assumption: we will focus solely on budget savings. Where can savings be made to finance the transition, from 2024 with the upcoming finance law, and in the longer term in the context of environmental planning? Without claiming to be exhaustive, we review different options for implementing budget savings, not so much to quantify these possible savings as to identify the challenges facing the government.


Where can savings be made? The usual suspects

The first option is to ask all ministries to make savings. This is what the Prime Minister has done: she has asked them for 5% savings on their budgets, excluding payroll, in order to free up 7 billion euros per year for the transition. Can the government make these savings? From 2024? This question is beyond the scope of our expertise. We note simply that the figure is significant in relation to needs, but that it remains to be seen how much the government will ultimately allocate to the transition, because climate action is not the only candidate for financing through these savings; the President has, for example, announced tax cuts for the middle classes.


The second option is the reform of climate-harming tax expenditures. When all is said and done, this reform amounts to increasing energy taxes for the economic sectors that benefit from exemptions, and therefore to increasing levies. The cost of these niches is estimated by the government at more than 7 billion euros per year. A recurrent theme in political life, this reform nevertheless remains a good idea that the government ought to, and says it wants to, revive. It will nevertheless be politically difficult. It will take time: the time for negotiations with the economic sectors concerned, and sometimes with our European partners. And it will undoubtedly bring in less than hoped, because in order to increase energy taxes for these sectors, they will need help to deploy alternatives, which could turn out to be even more costly in the short term for public finances. It remains to be seen what savings the government can make from 2024 onwards.


These two options are often put forward, but there are others, all of which consist in trying to implement the transition with less public money. In other words, options that imply debating the estimation of public spending in the Pisani report. After all, that is its purpose. These options are less prominent than those discussed so far, but they nevertheless shake up the techno-structure, and are therefore worth explaining.


Is it possible to implement the climate transition with less public money ?

First, to implement the transition while trying to use less public money, the government can generally prioritise regulation and taxation levers to trigger private investment, and thus rely less on the public spending lever. But are these levers fully substitutable? When implementing a prohibition, an obligation, or a tax, support is needed. In other words, when the state imposes an obligation, it obliges itself. It obliges itself to provide alternatives. Striking a balance between the carrot and the stick is a delicate exercise, as the government learnt with the yellow vests protests.


Another option is to prioritise certain technologies and sectors, to decarbonise these before the others, and to thereby spread the public spending effort over time. In a more or less explicit and assumed manner, a budget-constrained government will be forced to prioritise. This is understandable. But it is more difficult than it seems if we are to be sure to achieve carbon neutrality by 2050. Beginning with the least costly action is the most intuitive option, yet this is a potentially dangerous simplification (see “Proper use of the abatement cost to steer the transition”). When renovating an apartment, paint typically costs less than electricity, but this is not a reason to begin by painting.


Why not prioritise public spending towards those that need it the most? Let us take the example of electric cars. Some wealthier households have already made the switch and bought one, and it will soon no longer be possible to purchase new conventional vehicles. Wealthier households that have not yet shifted to electric mobility will be obliged to do so. Do they need to be assisted? Could we not further reduce or even remove this aid for these households, those in the top three income deciles, for example? A sort of reverse solidarity tax on wealth for climate action: instead of taxing the wealthiest to finance the transition, we give them less money. And the savings made are used to finance the transition for the middle and lower classes.


This option is worth exploring, and is undoubtedly already being looked at within the ministries, for subsidies as well as for public investments, for households as well as for local authorities and companies. But before even quantifying the possible savings, the government must first ask itself several questions. Will regulations and taxation be sufficient to ensure wealthy households nevertheless make their own transition? If these levers need to be strengthened, can we target wealthy households, even indirectly? Would reducing aid to wealthy households undermine political support for aid for the transition? There are no easy answers.


All options to finance the transition are worth exploring

There are still other possible options to try to implement the transition with less public spending, and all of them are difficult. Replacing subsidies wherever possible by third-party financing mechanisms? The government is already trying to do this, in particular with social leasing of electric vehicles at 100 euros per month. Trials are underway. Making the local authorities pay more? The negotiations are set to be complex, and while this may help to reduce public spending by the state, it will make no difference to total public spending.


All of these options are difficult, as is this last one: improving the effectiveness of public support mechanisms, ensuring that every euro spent is useful to the transition. Indeed, there is much criticism regarding the effectiveness of schemes such as MaPrimeRenov’ and the energy saving certificates. This criticism is long-standing, yet there are still no specific responses. Criticism is also levelled at the effectiveness of the major public aid programmes for companies. Deadweight effects, capture of aid by the most influential, poor governance, etc. Public spending is a public policy lever which, like taxation and regulation, has many shortcomings. The government must not resign itself to this and must strive to ensure the effectiveness of public spending. But once again, there will be difficulties ahead.

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