France stares into a “colossal” budgetary abyss – The Economist – 09.10.24
Michael Julien- Oct 10, 2024
- 4 min read
A fragile new government must try to plug the hole. Fast.
When a fresh-faced Emmanuel Macron swept into presidential office for the first time, in 2017, he hoped for a grand European bargain. France, which had not balanced a government budget since 1974, would fix its public finances and restore its credibility with its thrifty neighbour. In return, Germany, the euro zone’s biggest economy, would cede ground on French ideas for European integration, such as joint borrowing. Initially the bargain worked. In 2018 and 2019 France cut its annual deficit to below the EU’s limit of 3% of gdp. In 2020, nudged by the need to respond to the pandemic, the EU issued its first big joint bond.
Chart: The Economist
Now, however, that bargain is falling apart. After snap legislative elections in July returned a hung parliament, a new minority government is trying to keep a coalition together that, awkwardly, relies for its survival on the tacit support of Marine Le Pen’s hard right. Michel Barnier, the new conservative prime minister, is confronting a fiscal crisis.
France’s “colossal” deficit and debt, he declared on October 1st, is a “sword of Damocles” hanging over the country. In 2024, he said, the deficit will exceed 6% of GDP (next to 5.1% forecast earlier this year) and remain at 5% in 2025. It will fall back to 3% only by 2029, two years after Mr Macron’s previous government had promised. Government debt could reach 115% of GDP by the end of 2025.
France is facing an abrupt squeeze. In the budget for 2025, which Mr Barnier presents to cabinet on October 10th, he is expected to unveil a massive €60bn ($66bn) in savings, or 2% of GDP: two-thirds in spending cuts, one-third in tax increases.
On spending, Mr Barnier wants to delay raising public pensions in line with inflation for six months (saving €3bn) and impose widespread cuts on government departments (saving some €20bn). Other savings will come from local government, business subsidies and other measures. On the revenue side, proposals will include a temporary super-tax on firms with more than €1bn in turnover (raising €8bn) and on households earning over €500,000 (raising €2bn-3bn from some 65,000 households). Without these efforts, says Laurent Saint-Martin, the new budget minister, the deficit could reach 7% next year.
France’s neighbours are watching with a mix of weary familiarity and sharpening dismay. When asked this week about France’s deficit, Christian Lindner, Germany’s finance minister, replied drily: “We should all realise that the credibility of public finances vis-à-vis the capital markets is not to be trifled with.” On September 26th, for the first time since 2008, the yield on France’s ten-year government bonds exceeded Spain’s, usually considered riskier by investors. Mr Barnier knows he cannot get this moment wrong.
This year’s swollen deficit is partly the result of economic weakness, which depresses tax revenues and increases benefit costs. The underlying cause, though, is the overhang of generous state spending linked to covid-19 and the inflation surge prompted by Russia’s invasion of Ukraine. When the pandemic broke, Mr Macron vowed to protect the French “whatever it costs”. This became a guiding principle. Small firms were kept afloat after lockdowns ended. Untargeted caps on energy-price rises are still being phased out.
France spent a bigger share of GDP on such measures than Germany or Spain. The French did benefit. When Germany went into recession in 2023 the French economy kept growing, albeit by only 0.9%. But the fiscal cost of support just for households came to €69bn in 2022 and 2023 combined, says the Bank of France. And at 59% of GDP in 2021, the state already claimed a greater share of spending in France than any other OECD country.
Mr Barnier now needs to make his eye-watering budget savings while running a precarious minority government. The left will reject almost anything it tries. This puts the government’s ability to manoeuvre in Ms Le Pen’s hands. Parliament must approve the budget by December.
Paradoxically for a conservative, Mr Barnier will have less trouble getting new taxes through. Despite France’s unhappy record as the OECD country with the highest tax take as a share of GDP, tax increases on profits and the rich always go down well. “He’s doing a Hollande,” says a Macronist figure, referring to the previous Socialist president, François Hollande. Mr Macron used tax stability to make France more investor-friendly; many of his centrist deputies are now worried.
Nobody, however, will relish spending cuts, even if in reality some of the “savings” are in fact slower increases in spending. IFRAP, a think-tank, calculates actual year-on-year cuts to budgets to be closer to €15bn. Already Ms Le Pen has called the planned delay to raising pensions “stealing” from the elderly. Mr Barnier’s plans also rely, flimsily, on some classic but largely empty fallbacks, such as a clampdown on fraud. If he cannot secure parliamentary approval, he may have to resort to forcing the budget through using emergency measures, which would put his government’s survival on the line.
France is under close scrutiny. The European Commission has already put the country on formal watch, and will want evidence that it is not only serious about fixing public finances but intends to continue with reforms. France needs the commission’s permission to delay obeying EU rules until 2029. Three ratings agencies are also each due to report on France’s credit rating this month and in November.
The more Mr Barnier takes over nettlesome domestic policy, the more Mr Macron will turn to European and foreign affairs. The president has lost none of his ambition to reinforce European “strategic autonomy”. Yet this agenda, and his hopes of fresh joint borrowing and a bigger EU budget, depends heavily on his credibility.
As Mujtaba Rahman, European head of Eurasia Group, a consultancy, puts it: “If your own house is in disrepair, it is difficult to ask your neighbours to raise more debt.” Mr Macron is still seen as one of Europe’s main thinkers about how to face up to the continent’s fragile future. France’s perilous public finances now threaten to undermine his ability to do much about it. ■
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Photograph: Federico Yankelevich
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