In France, Record Taxation Rhymes with Record Debt

In France, Record Taxation Rhymes with Record Debt
Nicolas Marques // 29 January 2025
At €3.228 trillion, France’s debt has reached unprecedented levels, equating to 112% of GDP – far above the 60% cap set by European rules. Yet, France is also a global leader in taxation, with a social security contribution rate of 46.1% of GDP, according to the 2023 OECD Government Revenue Statistics. So, what is France doing with its money that other countries aren’t? How much of this spending is truly essential, and how much is excessive?
France ranks among the top three most indebted countries, with a public debt of 112% of GDP, surpassed only by Greece and Italy. This doesn’t include off-balance-sheet debt from pension promises, which amount to 400% of GDP, according to Eurostat. In total, France’s obligations to financial markets and retirees represent nearly five years of economic output.
France also leads Europe in social security contributrions, representing 46% of GDP compared to the EU average of 40%. Despite high taxes, deficits persist – a contradiction to claims that France has shifted toward a "supply-side economy."
This paradox of over-taxation and debt stems from a lack of diversification in pension financing. Many countries fund pensions through a combination of pay-as-you-go and capitalised systems, where pension contributions are invested to generate returns. In France, however, a pure pay-as-you-go model is used. Consequently, higher social contributions are needed to fund pensions. If France had embraced capitalized pensions like other developed nations, it could save €80 billion a year (3.2% of GDP) in taxes.
Pensions are the primary strain on France’s public finances, consuming a quarter of public spending and driving 45% of public spending growth since the end of the baby boom. France has not balanced its budget since the mid-1970s, largely due to mismanagement of aging demographics.
This excessive reliance on taxation also hampers economic activity, affecting competitiveness, purchasing power, and employment. To counteract these issues, governments have introduced tax relief measures. While necessary, these add to the deficit.
Government Spending Priorities
Social protection consumes the most resources in France, which ranks highest in social administration spending, allocating 25% of GDP compared to the EU average of 17%. In contrast, local authority spending is more contained at 11% of GDP, placing France 9th out of 27 EU countries, while general government spending is 21% of GDP, compared to the EU average of 17%.
The issue is not necessarily that the state spends excessively on its core functions but that it lacks long-term planning to enable effective administration and business performance.
The French government has not prepared for an aging population. Public employee pensions remain unfunded, resulting in a €60 billion shortfall annually. As a regulator, France has not encouraged social security systems to use collective capitalisation to support the pay-as-you-go model. If France had capitalised like other developed nations, it could gain dividends and capital gains worth 3% of GDP annually, easing retirement, competitiveness, and purchasing power pressures.
Additionally, the central government has not managed financial decentralisation, preventing local authorities from taking charge of their funding. Finally, burdensome regulations increase costs, reducing the production of goods and services and impacting households.
A Worsening Public Finance Situation
Budget Minister Laurent Saint-Martin announced that the public deficit might exceed 6% of GDP in 2024, up from the originally expected 5.1%. In addition, the national debt’s interest costs are expected to reach 1.7% of GDP due to rising rates. Combined with a public pension’s deficit projected at 2% of GDP, mismanagement-related expenses account for two-thirds of the deficit, creating a self-perpetuating financial strain.
This mismanagement also explains the decline in public services. For example, pensions consume 30% of the French education budget, far more than is invested in primary or secondary education. To improve public service quality, civil servant pensions need funding outside taxpayer contributions. If France followed the Senate’s model, it could save €30 billion annually; if it adopted the Banque de France’s approach of fully funding employee pensions, it could save nearly €60 billion.
Loss of Market Confidence
France’s borrowing at higher interest rates than Greece or Spain reflects a loss of confidence due to its inability to adopt a credible fiscal strategy. With interest rates climbing, establishing a feasible path for public finances is critical. Some advocate for higher taxes, but this would likely reduce growth and complicate the financial situation further.
Addressing the root of the problem – inefficient pension financing – is essential. France urgently needs to grow private-sector collective capital to support the struggling pay-as-you-go model. In the public sector, funding for civil servant pensions must begin. Without these structural reforms, France’s public finances will remain fundamentally unbalanced.
This blog was originally published in French by IEM.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).