France’s new government on Thursday presented a draft budget containing 60 billion euros ($65.6 billion) in tax increases and spending cuts, with analysts warning the plan may not be enough to avoid an economic downgrade.
The 2025 budget focuses more on tax increases than some expected. Analysts also pointed to “politically complex” proposals such as delaying pension inflation adjustments and cutting spending on local governments, civil servants and the health care system.
Other key factors include a temporary surcharge on large shipping companies and businesses with annual revenues of more than 1 billion euros, affecting around 440 companies; an income tax surcharge on households with incomes above 500,000 euros; the reintroduction of the electricity consumption tax; increases in air tickets and high-end Taxes on emitting cars.
One of the central goals of the budget is to reduce France’s projected 6.1% deficit in 2024 to 5% of gross domestic product next year – to comply with EU rules that member states’ budget deficits should not exceed 3% of GDP.
The government has set a new target for achieving the rule by 2029, an extension of the previous target of 2027.
political challenge
Hadrien Camatte, senior economist for France, Belgium and the euro zone at Natixis, told CNBC that the task of raising 60 billion euros in a year leaves the government with no choice, meaning it must turn to those “politically complex ” field. Friday, Squawk Box Europe”.
this fragile french government The coalition led by Prime Minister Michel Barnier already faced a no-confidence vote this week but ultimately survived.
The government was established last month contentious negotiations After July’s parliamentary elections, the left-wing New Popular Front (itself a relatively splintered coalition) won a majority of seats but failed to give any party or coalition a majority.
Barnier acknowledged this, viewing the draft budget as a starting point for debate among lawmakers and saying he was open to changes that would maintain fiscal integrity.
“There will be some changes and there will be a lively debate on pensions and social security contributions,” Kamat said. The budget debate will begin on October 21, with review of various aspects of the budget starting on October 29. Partially vote.
“The thing is, when you have to find $60 billion, we’ve never found $60 billion in one year, it would be unprecedented, and that’s why it’s not very credible to find such a huge amount of money, especially when there are only very fragile In relatively most cases.
tax focus
Goldman Sachs analysts said in a note on Friday that the policy mix underpinning the 2025 budget “leans more toward spending cuts and toward tax increases than we expected.”
“The scale of the proposed merger and the corresponding reliance on tax increases leave us less confident in the government’s ability to meet the 5.0% deficit target by 2025. Our previous research found that sudden adjustments and tax-based mergers tend to lead to sustainable improvements in the fiscal position “lower chance of success,” they wrote, noting their own deficit forecast of 5.2%.
However, they also noted that the potential for political stability in the short term may exist, given that the government survived a no-confidence vote on 8 October.
On October 10, 2024, French Minister of Economy, Finance and Industry Antoine Armand arrived at the Elysée Palace to attend the weekly cabinet meeting in Paris, where the French 2025 budget was presented.
Ludovic Marin | AFP | Getty Images
That means the current base case is for the government to pass a budget bill before the end of the year, but there is greater uncertainty after that, they said.
“When you need fresh money very quickly, you have no choice but to increase taxes. The problem is that taxes in France are already very high,” Natixis’ Kamat told CNBC, noting that France has the highest payroll tax rate. second.
Erik-Jan van Harn, senior macro strategist at Rabobank, said that despite the emphasis on tax increases, the bill’s unbundling would reduce government spending by 40 billion euros and increase revenue by 20 billion EUR.
However, he added: “Barnier’s ambitious plans are fraught with implementation risks. His government has promised until 2029 but is unlikely to survive before then.”
Rating risk
Questions remain about what the 2025 budget will mean for France’s economic growth and whether the country can avoid a further downgrade of its sovereign debt rating after agency budget cuts Standard & Poor’s and Fitch the past two years.
Evelyn Herrmann, European economist at Bank of America Global Research, told CNBC’s “Squawk Box Europe” on Friday that the government has taken a series of measures to try to avoid damaging economic growth.
“The hope is that by doing this, and by focusing more on high-income groups and particularly profitable companies – and a commitment to do that for the time being – maybe you can avoid the typically strong impact on growth that these measures have,” she continued. said.
However, analysts at Goldman Sachs expect the plan’s impact on economic growth to shift from a 0.3 percentage point boost in 2024 to a 0.5 percentage point drag in 2025 and 2026; while UBS said that historically, GDP A 2% fiscal consolidation “could harm economic growth.”
Statistics agency Insee this week forecast that France’s economy will grow by 1.1% this year, a forecast that Natixis’ Camatte said was “perhaps a little too optimistic, if not unrealistic.”
“My concern is the trajectory beyond 2025 because the measures to reduce the deficit beyond 2025 are not on record and France’s trajectory is clearly a risk when you do a debt sustainability analysis,” he said.
He added that in the short term, the lack of budget specifics would keep ratings agencies on the sidelines but could not rule out a negative outlook from S&P or Fitch.
Kamath said: “It is more necessary to remain calm at this stage and let us decide next year to see whether the reduction in spending is credible.” However, he expects Moody’s, which has always maintained a high rating for France, to enter a negative outlook this year and then downgrade next year.
Rabobank’s van Haan was more pessimistic, arguing that deep spending cuts would “constrain economic growth” and that “a downgrade from one of the major ratings agencies seems likely.”
“Radical austerity comes at a cost. A sharp shift in France’s fiscal stance will hamper already weak economic growth. The government would do well to consider the economic side effects of its policies, but a lack of political capital may mean that Barnier will be forced to make mistakes decision,” he said on Friday.
“Given the risks that (Fitch) has highlighted and the relatively optimistic nature of its early forecasts, we believe a downgrade is likely. While this is clearly not a positive outcome from a spread perspective, we believe the market has This measure has been digested to a certain extent.”
— CNBC’s Charlotte Reed contributed to this article
