Trésor-Info - Publications de la direction générale du Trésor - Public-finances

Examining the Composition of VAT Revenues in France

2025-09-25T00:00:00+02:00

Value-added tax (VAT) was introduced for the first time in 1954 by France and accounted for 17% of aggregate taxes and social security contributions in 2022. About half of VAT revenues accrues to the central government, while the other half is allocated to local authorities and to the social security system.

The costing model for theoretical VAT is a tool that combines tax and national accounts data to examine the composition of VAT revenues. Its purpose is to reconstitute consumption bases subject to VAT, i.e. to break down expenditure generating VAT revenues by type of product, by rate, by use and by type of consumer. The model makes it possible, for example, to determine how much of a specific product households consume (such as beverages) and to find out the breakdown between non-alcoholic beverages, which are subject to the reduced rate of VAT (5.5%), and alcoholic beverages, which are subject to the standard rate (20%).

The model can estimate the fiscal impact of VAT reform by product and the cost of existing tax expenditures, excluding knock-on effects on consumer behaviour. For instance, the net revenue gain from a 1-percentage-point change in VAT rates is estimated to be €11.4bn in 2025.

VAT is a revenue raising instrument with a limited redistributive impact. The VAT burden weighs most heavily on high-income households, although it represents a slightly larger share of the income of low-earning households. Certain reduced rates affect high-income households more positively.

Review of Public Finance Forecasts for 2023 and 2024

2025-01-20T00:00:00+01:00

The economic and public finance forecasts for 2023 and 2024 were drawn up amid much uncertainty with highly volatile energy prices, a very high inflation rate and unprecedented monetary policy tightening.

For 2023, while real growth was closely aligned with the forecast (0.9% vs 1.0%), high levels of inflation provoked more substantial revisions of nominal growth, that was initially projected at 4.6% in autumn 2022 then at 6.8% a year later, and which ultimately stood at 6.3%. For 2024, real growth, that was first forecast at 1.4%, was revised downwards to 1.1%, and the nominal growth forecast was reduced from 4.0% in autumn 2023 to 3.5% a year later as it was affected by the faster-than-expected fall in inflation.

The 2023 general government deficit was –5.5% of GDP (–5.3% excluding the change of base year for the national accounts by Insee, the National Institute of Statistics and Economic Studies), compared to the projection of –4.9% in autumn 2023. The 2024 deficit figure has not yet been finalised: the most recent official forecasts were for –6.1 % of GDP, following a projection of –4.4% in autumn 2023, that was revised to –5.1% in April 2024. These revisions are significant but not unheard of from a historical standpoint.

In 2023, the spontaneous growth in aggregate taxes and social security contributions, i.e. without factoring in discretionary measures, was much lower than that of nominal growth (2.6% vs 6.3% for nominal GDP), in contrast to 2022 which was an exceptional year. Such a contrast was anticipated as early as July 2022 but its scale was much larger than projected. Central government expenditure was lower than forecast unlike local authority expenditure.

In 2024, revenue from aggregate taxes and social security contributions was subject to major reassessments due to unexpected events in 2023 that were heightened by the delayed functioning of corporation tax and income tax. It was also slowed by lower nominal growth in GDP that was less driven by private domestic demand, and which had an impact on VAT revenue. In addition, there was a surprisingly high level of local authority expenditure whilst central government expenditure is expected to be lower than provided for in the 2024 Initial Budget Act due to management measures introduced during 2024.

Update

Following the publication by Insee, the National Institute of Statistics and Economic Studies, of the general government accounts, the 2024 general government deficit was ultimately −5.8%, that is to say 0.3 points of GDP more than the projection used in the 2025 Budget Bill and on the basis of which this edition of TrésorEconomics was produced in January 2025.

Revisions constitute an overall improvement of roughly €9.5bn and essentially concern:

• local authority expenditure (+€6.5bn), which turned out to be lower than expected when the 2025 Budget Bill was being prepared, due to a slowdown in this local expenditure starting in autumn 2024. For instance, local authorities’ investment expenditure rose 7.6% in 2024 compared to the 13.2% increase forecast in the 2025 Budget Bill, which was based on the latest accounting data from summer 2024. Operating expenses rose by 3.5% but this was still significantly less than the 4.6% projected in October 2024.

• central government expenditure (up €3.4bn), was less than forecast in autumn 2024 owing to a budget outturn that was even lower than estimated in the Initial Budget Act.

• the 2023 deficit was also revised to −5.4% of GDP, i.e. up 0.1 points compared to the provisional account published by Insee in May 2024.

Table 1 relating to the revision of the general government balance in 2023 and 2024 between the budget bills for 2024 and 2025 has been updated as follows :

Italy and its Demographic Challenge

2023-10-24T00:00:00+02:00

Italy is the third most populous country in the European Union. After reaching a peak of 60 million in 2014, Italy’s population fell to 59 million in 2022 and could drop to 47 million by 2070. In 2022, while Italy recorded fewer than 400,000 births – the lowest figure since the country’s unification in 1861 – it posted more than 700,000 deaths, the highest level since the 2020 COVID-19 pandemic. Immigration can no longer offset this stark natural decrease.

Italy has a rapidly ageing population: life expectancy, which now stands at 83, has increased by three years since 2000. According to the World Bank classification, Italy has had a “very old population” since 2007, falling into this category three years after Japan and 11 years before France. Ahead by a few years, Italy’s declining population is a harbinger of the EU’s own depopulation by 2030 according to Eurostat projections.

A dwindling and ageing population is hampering GDP growth given changes in (i) the workforce and labour market participation and (ii) investment and productivity in an economy largely formed by family-owned VSEs and SMEs faced with the issue of their hand over.

This “longevity shock” puts pressure on public finances, since it increases the proportion dedicated to pensions, healthcare and long-term care expenditure in the budget. While the percentage of over-65s is growing, that of the workforce is shrinking, raising the risk to the sustainability of public debt which stood at 141.7% of GDP in 2022.

Measures – whose outcomes are as yet unclear – have been taken to mitigate the impact of unfavourable demographic changes: pronatalist policies, labour market reform and selective immigration. Changes to the pension system for 2024 have yet to be determined.

Public Deficit on Target in 2022 Despite the Energy Crisis

2023-07-28T00:00:00+02:00

The 2022 public deficit published by the National Institute of Statistics and Economic Studies (INSEE) on 31 May 2023 stood at 4.7% of GDP. This figure is close to the 5.0% of GDP target set out in the 2022 Budget Bill, as revised on 22 October 2021, and upheld in the two 2022 Supplementary Budget Acts.

However, an imported inflation shock of more than 4 percentage points in 2022 had a strong impact on revenues and expenditure through several channels.

Spontaneous growth of taxes and social security contributions outstripped GDP growth by a wide margin. This major stylised fact was incorporated into the forecasts in the first 2022 Supplementary Budget Bill in July 2022. It stemmed primarily from the components of growth, the strength of wage growth and the large increase in taxable corporate profits in 2021, which has a lagged impact on government revenues.

The inflation shock affected expenditure in two main ways: (i) the indexation of certain expenditure; (ii) the measures implemented since the end of 2021 to protect businesses and households from inflation.

In the fourth quarter of 2021, it was impossible for the Budget Bill to foresee the scale of the energy shock or the measures that would be introduced to support households and businesses. However, the capacity for rapid revisions of forecasts to allow proportionate discretionary tax measures and resolute commitments to the deficit target made it possible to attain a deficit that was close to the original target, despite the shocks affecting revenue and expenditure (see Chart).

China's Public Finances: Short-Term Risks and Structural Issues

2023-05-23T00:00:00+02:00

Public finances have been a major driving force behind China’s growth, not least through public investment at the local level particularly since the 2008 crisis. In 2019, China’s public spending amounted to 24% of GDP according to official statistics, versus the 36% and 41% figures reported by the IMF and the OECD respectively.

Analysing China’s public finances is hindered by the lack of clarity in the definition of the prerogatives of various administrative levels (central, provincial, prefecture, county, city) in the Constitution of the People’s Republic of China and Chinese law, as well as by the fact that national laws often merely outline principles which are subsequently implemented at local level with significant leeway. The structure of public accounts is also based on opaque and complex methodology, lacking clarity on what spending falls within their scope, and the line between local and central government sometimes being blurred.

Public accounts structurally post a high level of deficit and debt. These two indicators have considerably worsened over the past few years, particularly as a result of the COVID-19 pandemic (see Chart). The situation at local level now emerges as a financial stability issue, with 57% of total government debt incurred at this level – according to official data – in a relatively
opaque way.

While local financial risks are high, a short-term systemic crisis seems unlikely given the guarantees granted by the central government and the fact that a large portion of the debt is held by major banks and local government entities.

Over the long term, imbalances and risks relating to public finances hamper growth and its necessary rebalancing, implying a shift from investments to domestic consumption. Despite the proactive stance of the authorities and the repeated recommendations of international observers, implementation of the reforms – a designated priority since 2013 – is still a slow and piecemeal process.