A Structured Guide to Understanding Public Debt

Over €3 trillion. This astronomical figure, often brandished in public debates, represents France's public debt. It's so large that it becomes abstract, a distant concept disconnected from our daily lives. Yet, this debt is much more than a mere line item in the nation's accounts. It's a mortgage on our collective future, a burden we are passing on to our children and grandchildren. Based on our experience in financial analysis and the pursuit of economic independence, understanding this mechanism is the first step toward regaining control and building a resilient investment strategy.

This guide is designed to demystify public debt. We will break it down, piece by piece, to give you the essential keys to understanding it. Forget the complex jargon; here, we speak plainly so that every citizen can grasp the issues behind the infamous "wall of debt."

Public Debt vs. Deficit: Don't Confuse the Two

First and foremost, it's crucial to distinguish between two often-confused terms: deficit and debt.

• The Budget Deficit: This is the negative balance of the government's budget over a single year. If expenditures (public services, civil servant salaries, investments, etc.) exceed revenues (taxes, duties, etc.), the state has a deficit for that year. It's a flow.
• Public Debt: This is the accumulation of all past annual deficits that the government has not yet repaid. It's a stock. Each year of deficit is therefore added to the total amount of debt.

To put it simply: if your monthly salary is €2,000 and you spend €2,200, your deficit for the month is €200. The debt is the total amount you owe your banker after several months or years of doing this.

As the Court of Auditors highlights in its annual report on the state and outlook of public finances, "the persistence of a high deficit fuels a debt dynamic that, if not controlled, weighs on the country's economic sovereignty."

The Famous "Debt-to-GDP" Ratio: The Real Indicator

The raw debt figure (€3 trillion) is impressive, but it doesn't tell the whole story. To assess the sustainability of a country's debt, economists use the Debt-to-GDP ratio. GDP (Gross Domestic Product) represents the total wealth produced by a country in one year. This ratio is therefore equivalent to comparing your total loans to your annual salary. A ratio of 100% means the country owes the equivalent of an entire year's worth of its wealth production.

This indicator allows us to:

1. Compare countries with each other: A debt of 1 trillion has a different weight for the US economy than for the Belgian economy.
2. Assess the evolution over time: It shows whether the country is getting into debt faster than it is creating wealth.

This is the ratio that rating agencies (like Moody's or S&P) and investors watch very closely.

When a government needs money to finance its deficit, it doesn't just ask a bank for a loan like an individual would. It issues debt securities on the financial markets. In France, this task is handled by the Agence France Trésor (AFT).

These securities are primarily bonds, the famous OATs (Obligations Assimilables du Trésor). By purchasing an OAT, an investor lends money to the French government for a fixed period (from 2 to 50 years) in exchange for an annual interest payment (the "coupon") and the repayment of the principal at maturity. The interest rate on these bonds is crucial: the higher it is, the more the cost of debt increases for the state, and therefore for taxpayers.

Who Are France's Creditors?

Contrary to a persistent misconception, France's debt is not held by a few threatening foreign countries. Its holders, or creditors, are actually very diverse. According to AFT data, the breakdown is roughly as follows:

• Non-residents (about 50%): This is a diverse group of foreign actors: central banks of other countries, pension funds, insurance companies, investment funds, etc. They are attracted by France's reputation as a reliable borrower.
• Residents (about 50%):
  • French insurance companies: They buy OATs to back the funds in life insurance policies.
  • French banks: They use these securities for their operations and as safety reserves.
  • Households and businesses: Indirectly, through their savings products (life insurance, mutual funds, etc.).

Our experience in financial analysis shows us that this diversification is a strength. It prevents the state from becoming dependent on a single type of creditor.

The economist Patrick Artus has often pointed out that "the important thing is not so much who you owe money to, but whether you can maintain the trust of those who lend it to you." This trust is the keystone of the entire system.

Public debt is not just a macroeconomic concept. Its effects ripple throughout the economy and directly impact our daily lives, and especially those of future generations.

1. The Debt Burden: "Debt Servicing"

This is the most direct consequence. Every year, the government must pay interest on the capital it has borrowed. This "debt servicing" represents a significant portion of the state budget. In 2023, it became the largest item of expenditure, surpassing even the national education budget. This is money that cannot be allocated to hospitals, schools, the ecological transition, or tax cuts.

2. A Mortgage on Future Generations

This is arguably the most serious issue. High debt today means that future governments will have very little room for maneuver. To repay it, future generations will have only a few options, all of them painful:

• Massively increase taxes.
• Drastically cut public spending (pensions, healthcare, education).
• Rely on strong economic growth, which is far from guaranteed.

It's an intergenerational transfer of burden. We are living today with public services financed by a debt that our children will have to repay. This reality should compel every citizen to take an interest in the management of public finances and to seek ways to build their own financial independence, for example, by learning how to generate passive income.

3. The Loss of Economic Sovereignty

A heavily indebted state is a vulnerable state. It depends on the goodwill of financial markets to refinance itself. The slightest crisis of confidence can cause interest rates to spike, making the debt burden unsustainable. The country then loses its autonomy and can have its fiscal policies dictated by its creditors or by international institutions, as was seen during the Greek crisis.

4. The Impact on Your Wallet and Purchasing Power

The policies implemented to manage the debt have direct repercussions for you:

• Interest rates: High public debt can push the central bank to maintain higher policy rates to attract capital, which increases the cost of your mortgages or consumer loans.
• Inflation: Sometimes, governments may be tempted to let inflation run high to "erode" the real value of their debt. This is a form of hidden tax that reduces your purchasing power.

Faced with this macroeconomic uncertainty, understanding investment mechanisms and knowing how to live off investments is no longer a luxury, but a strategy for protecting one's wealth in the long term.

There is no magic solution to resolve such a colossal debt. Governments have several levers, often combined and politically sensitive:

• Controlling spending (austerity): Reducing state expenditures. This is effective but can have a negative impact on public services and slow down short-term economic growth.
• Increasing revenue (taxes): Raising taxes and duties. Unpopular, this measure can also weigh on competitiveness and consumption.
• Economic growth: This is the ideal lever. If GDP grows faster than the debt, the Debt-to-GDP ratio decreases mechanically. This requires structural reforms to stimulate innovation and employment.
• Inflation: As mentioned, inflation that is higher than interest rates reduces the real weight of the debt. It's a silent but dangerous solution, as it penalizes savers and the most modest households.

Ultimately, understanding public debt is to hold an essential key to economic citizenship. It's not just a matter for experts, but for all of us, because its consequences shape the society we live in and the one we will leave behind.

To ensure the rigor of this article, we have relied on data and publications from official institutions. We encourage you to consult them to delve deeper into the subject.

• INSEE (National Institute of Statistics and Economic Studies): Provides the official definitions and key figures for GDP, deficit, and public debt in France. An essential source for macroeconomic data.
• Agence France Trésor (AFT): The official entity responsible for managing the state's debt and treasury. Their website publishes detailed statistics on debt issuance and the breakdown of creditors.
• Bank of France: Regularly publishes analyses and economic outlooks on the French economy, including in-depth studies on the sustainability of public debt.
• Court of Auditors: In its annual reports, this independent institution audits the state's accounts and issues recommendations on public financial management, offering a critical and informed perspective.