(Bloomberg) — France is about to unveil its initial course of shock therapy to tackle swelling deficits, aiming to reassure skeptical bond investors and navigate forceful opposition in a fractured parliament.
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Prime Minister Michel Barnier’s government will present the details to his cabinet on Thursday evening in Paris as he attempts to narrow the annual budget shortfall by more than a percentage point to 5% of economic output in 2025.
Ministers have already flagged that the task will require an eye-watering €60 billion ($65.7 billion) of spending cuts and tax increases — a magnitude of effort rarely undertaken in France. And that’s just a first step in the task of getting the budget gap within the EU’s 3% limit by 2029.
If Barnier fails to convince investors, the nation’s debt costs could spiral. But if he can’t persuade parliament, the government could be evicted from office.
“A crisis, if we do nothing, is probable,” Barnier said in an interview with La Tribune Dimanche. “Our duty is to prevent it.”
Here’s what to watch for when tonight’s presentation is released.
Credibility
The central objective is to restore France’s waning credibility with investors who have sold the country’s bonds amid political instability following the snap elections and repeated fiscal slippages.
The previous administration’s initial budget this year planned to bring the deficit to 4.4% of economic output, but the most recent warning from the new government puts the shortfall at more like 6.1%.
A key reason for the deterioration is poor tax receipts, because consumer spending and investment have languished or even contracted for nearly a year. That leaves the government seeking cuts that won’t exacerbate things by inflicting too much pain on the economy.
The finance ministry has said it will base the 2025 budget on a 1.1% growth forecast — a prediction officials say takes into account a small hit from narrowing the deficit to 5% of economic output.
The deficit target in the initial text presented on Thursday evening may be slightly wider, at 5.2% of gross domestic product, because the government plans to introduce further measures by amendment during its passage through parliament.
Tax
Barnier’s plan for €20 billion of tax increases next year has sparked a furor in parts of parliament, even among the minority of lawmakers backing his government. Centrists loyal to Emmanuel Macron have threatened dissent, arguing that the measures risk undoing a pro-business legacy of the president that they see as crucial for jobs and growth.
To rally support, Barnier has pledged that the tax hikes will apply for two years at most and be limited to the wealthiest 0.3% of households and around 300 businesses with more than €1 billion a year in annual revenue. The exact parameters of the measures will be closely watched to determine who is being targeted and how the economy could be impacted.
The government plans to raise more revenue from penalties on gas-guzzling cars and levies on the most polluting forms of transport. Automotive lobbies have already slammed the ideas as “tax under the guise of energy transition.” The International Air Transport Association has warned of a consequent disaster for employment and growth in the sector.
Barnier’s team — spearheaded by Finance Minister Antoine Armand and Budget Minister Laurent Saint-Martin — could also deploy measures prepared by their predecessors to tax share buybacks and raise more from levies on energy companies.
Cuts
Around half of the €40 billion of spending cuts will come from capping the budgets of state ministries, with the rest to be shouldered by local authorities and the social security system.
The government has already touted some possibilities, including saving €4 billion by delaying the indexation of pensions to July 1. Barnier has said he aims to save as much again by paring back tax breaks for businesses — notably linked to employment — to €76 billion.
The prime minister has also said he plans to merge state agencies to cut costs, better target spending on apprenticeships that was increased after Covid, and negotiate with parliament to find ways to curtail the rising outlays for sick leave.
Political Reaction
The response of different political parties is crucial. The leftist bloc with around a third of seats in the National Assembly has already said it is opposed outright to Barnier’s administration, irrespective of the content of the budget.
However, the left doesn’t have enough seats to topple the government alone — it already tried and failed to do that earlier this week.
The biggest threat to Barnier comes from Marine Le Pen’s National Rally, which can end his time in office if it supports a censure motion from another group.
Le Pen has slammed some of the budget plans, notably describing the cuts to pension costs as “theft.” But her party has taken a more ambiguous position overall, saying it doesn’t want to be the agent of chaos that could further damage the country’s financial situation.
What Bloomberg Economics Says…
“The fiscal effort needed to reach Barnier’s new targets is already substantial — the decision to finance a third of the consolidation plans through tax hikes on wealthy individuals and profitable corporations, despite the strong opposition from his allies in Macron’s camp, underscores the magnitude of the challenge.”
— Eleonora Mavroeidi and Maeva Cousin. For full research, click here
Barnier has said he is open to parliament making significant changes to the budget bill, so long as the outcome still delivers €60 billion in savings.
Markets
The market is focused primarily on the credibility of Barnier’s fiscal plan, with only the broad proposals sketched out so far.
The gap between French and German 10-year yields, a proxy for French risk, is trading at 77 basis points, close to recent highs.
The debt office’s funding plan for 2025 will also be watched closely, with higher-than-expected bond sales likely to weigh on yields. Citigroup analysts are expecting gross supply of €300 billion net of buybacks next year.
–With assistance from Alice Gledhill and James Regan.