A victory for the far-right politician Marine Le Pen in France’s election would send national debt to unprecedented levels, according to Goldman Sachs.
The investment bank's analysis indicates that the proposed €38 billion (£32 billion) in tax cuts and additional public spending from Le Pen's National Rally (RN) would lift France’s total debt from £2.46 trillion to £2.96 trillion.
RN’s fiscal agenda includes a progressive income tax cut, reductions in production taxes, and VAT cuts on food and energy.
Range of outcomes
These measures would cost the public purse €30 billion, Goldman estimated, while RN's proposal for a wealth tax is forecast to generate only €2 billion.
Goldman Sachs economists see "a range of plausible outcomes" for the elections, including a "status quo" result whereby President Emmanuel Macron’s allies and the centre-right gain an absolute majority, the far-right could top the polls but fall short of an absolute majority.
The far-right securing an absolute majority is also seen as plausible.
US election
Economic and fiscal policies will be directly affected by the upcoming elections, the US investment bank said.
"We would look for both a minority far-right government and a broader coalition to result in a political deadlock with slower fiscal adjustment but limited broader economic implications.
"It is harder to assess the potential economic implications of a majority far-right government, in particular, because of the absence of a policy platform so far."
If a far-right government got into power they could "interfere" with European economic policy, as policies regarding the single market and immigration restrictions are likely to be deemed at odds with European law and "could create frictions in the dialogue with Brussels".
Sizeable expansion
While Macron’s Renaissance party has committed to reducing public spending to lower the deficit, RN plans a “sizeable fiscal expansion” with increased spending on security, defence, and the judicial system, which Goldman Sachs estimates will cost a further €10 billion.
The Goldman Sachs economists stated that these combined measures would drive France’s debt burden to 120% of GDP, as opposed to a stabilisation at 113% if Mr Macron’s party were to win.
This would be a doubling of the debt burden from 2002 when it was 60.3% of GDP.
Such an increase in debt is expected to cause a surge in French bond yields, significantly raising government borrowing costs.
“Our model includes a small feedback effect from fiscal policy to growth but does not consider the negative growth effects stemming from tighter financial conditions and the undoing of structural reforms,” Goldman said and acknowledged the “considerable uncertainty” regarding the election outcome.