France’s newly-installed government unveiled a draft budget on Thursday, which includes 60 billion euros ($65.6 billion) in tax increases and spending cuts. Analysts cautioned that these measures might not be sufficient to prevent the economy from facing ratings downgrades.
The 2025 budget places a stronger emphasis on tax-raising initiatives than anticipated. Analysts highlighted challenging proposals such as postponing an inflation adjustment for pensions, reducing funding for local government, the civil service, and the healthcare system.
Key components of the budget involve imposing temporary additional taxes on large shipping firms and corporations earning over a billion euros annually, affecting about 440 companies. It also includes an income tax surcharge on households with incomes exceeding 500,000 euros, reintroducing a levy on electricity consumption, and raising taxes and fees on airline tickets and high-emission cars.
A primary objective of the budget is to decrease France’s projected 6.1% deficit for 2024 to 5% of the gross domestic product next year, aligning with European Union regulations that limit a member nation’s budget deficit to 3% of GDP.
The government has set a new target to achieve this rule by 2029, extending the previous goal of 2027. Failure to take action could result in the deficit ballooning to 7% next year.
The government faced limited options in raising 60 billion euros within a year, leading to the adoption of politically complex measures, as noted by Hadrien Camatte, a senior economist at Natixis. The fragile French government, under Prime Minister Michel Barnier, survived a recent vote of no confidence.
Following the July parliamentary election, which did not yield a majority for any party or coalition, the current government was formed after challenging negotiations. Barnier described the draft budget as a starting point for discussions with lawmakers, acknowledging the need for changes to maintain fiscal integrity.
Analysts at Goldman Sachs expressed concerns about the budget’s heavy reliance on tax increases, which could hinder the government’s ability to meet the 2025 deficit target. Despite potential near-term political stability, uncertainties persist beyond passing the budget bill by year-end.
The impact of the budget on economic growth and the possibility of further credit downgrades on France’s sovereign debt remain key concerns. Measures have been designed to minimize adverse effects on economic growth, with varying opinions on the potential outcomes.
Insee forecasted 1.1% growth for the French economy this year, a projection viewed with caution by experts. The trajectory beyond 2025 raises concerns about debt sustainability, with uncertainties surrounding future deficit reduction measures.
Ratings agencies are expected to adopt a wait-and-see approach due to the lack of specific budget details. Moody’s, which has maintained a favorable rating on France, may shift to a negative outlook this year before a downgrade next year. Rabobank’s Van Harn warned of potential economic growth constraints and the likelihood of a rating downgrade by major agencies.
The government’s fiscal stance and policy decisions will play a crucial role in shaping France’s economic outlook. The market is already factoring in potential rating downgrades, reflecting the challenges ahead for the French economy.
