France unveiled its 2025 budget proposal, a **€60 billion ($65.6 billion)** plan encompassing significant tax increases and spending cuts. This ambitious fiscal maneuver aims to reduce the nation’s projected deficit, but faces significant political hurdles and raises concerns about potential negative impacts on economic growth and credit ratings. The plan, while aiming for a 5% deficit-to-GDP ratio by next year, has been met with skepticism from analysts who question its feasibility and long-term sustainability, given the country’s current political climate and high existing tax burden.
Key Takeaways
- France’s 2025 budget proposes **€60 billion in tax hikes and spending cuts**, aiming for a 5% deficit-to-GDP ratio (down from 6.1% projected for 2024).
- The plan faces **significant political challenges**, with a fragile governing coalition and potential backlash over unpopular measures like pension adjustments and public service cuts.
- The budget relies heavily on **tax increases**, targeting corporations, high-income households, and specific sectors (air travel, high-emission vehicles), raising concerns about its impact on economic growth.
- Analysts warn of **potential credit rating downgrades** if the government fails to meet its deficit reduction targets, further impacting France’s economic standing.
- The government’s ambitious target to meet EU deficit rules by 2029, an extension of the previous 2027 goal, underscores the magnitude of the fiscal challenge.
A Politically Turbulent Path to Fiscal Consolidation
The French government, led by Prime Minister Michel Barnier, finds itself navigating a treacherous path. The recently passed budget, while presented as a necessary step towards fiscal responsibility, immediately sparked controversy. Senior economist Hadrien Camatte of Natixis described the measures as “politically complicated,” highlighting the inherent difficulties in implementing such drastic changes. The government, a fragile coalition formed after fraught negotiations following the July parliamentary elections, has already withstood a vote of no confidence this week. This displays the volatile political landscape in which a budget of this magnitude must pass.
Navigating Political Opposition
The budget’s proposal includes a delay in inflation adjustments for pensions, impacting many citizens negatively. Further fueling the political tensions are planned cuts to local government, the civil service, and the healthcare system. These measures have triggered opposition from various political factions and social groups. While Barnier frames the budget as a starting point for discussion, the coming debates in parliament promise to be intense and uncertain, with votes on components of the bill beginning at the end of October.
“The problem is when you have to find 60 billion, we have never found 60 billion in one year, it would be unprecedented, and that’s why it’s not very credible to find so huge an amount, especially with only a very fragile relative majority,” Camatte pointed out, emphasizing the sheer scale of the undertaking and the precariousness of the governing coalition’s position.
A Heavy Reliance on Tax Increases
Goldman Sachs analysts characterized the budget’s approach as unexpectedly tax-heavy. “The magnitude of the proposed consolidation and the corresponding reliance on tax increases leave us less confident in the ability of the government to meet its 2025 deficit target of 5.0%,” they stated in a recent note. Their own forecast pegs the deficit at 5.2% for 2025. Although they note the possibility of some near-term political stability (following the recent successful no-confidence vote), greater uncertainty looms.
The High Cost of Quick Revenue
Natixis’ Camatte underscored the constrained options available to the government. “When you need fresh money very quickly, you don’t have any other option than increasing taxes. The problem is that tax is already very elevated in France,” he explained, noting France’s ranking at second highest wage taxation rate in Europe. The budget aims to cut government spending by **€40 billion** while increasing revenues by **€20 billion**, according to Rabobank’s Erik-Jan van Harn. Even with this approach, the long-term prospects appear challenging. **”Barnier’s ambitious plans are fraught with implementation risks. His government commits until 2029 but isn’t very likely to survive until then,”** he warned.
The Looming Threat of Credit Downgrades
The question remains: what impact will this budget have on France’s economic growth and sovereign debt rating? France has already experienced rating cuts from S&P and Fitch in recent years. The government’s strategy here is to spread the measures across broad sectors aiming to mitigate economic damage.
Assessing the Economic Consequences
Bank of America’s Evelyn Herrmann points to this strategy as a mitigating factor: “There is the hope is that by doing that and by going more into perhaps the upper income groups and the particularly profitable companies — and the promise to do that temporarily — perhaps you avoid a kind of typical strong effect on growth of these measures.” However, this optimistic view is tempered by other analysts’ warnings. Goldman Sachs estimates that the fiscal consolidation measure will negatively impact economic growth. Their model suggests a shift from a 0.3 percentage point boost in 2024 to a 0.5 percentage point drag in 2025 and 2026.
Insee, the French statistical agency, projects 1.1% growth for 2024. Camatte sees this as perhaps optimistic but not unrealistic. His concern lies in the post-2025 period, where the lack of detailed plans raises serious questions about debt sustainability, creating a risk in the French economy.
Rating Agency Outlook
Camatte anticipates a period of watchful waiting from ratings agencies, pending more concrete information. However, he does not rule out negative outlooks or downgrades. He particularly notes that Moody’s – so far maintaining a better rating on France – might issue a negative outlook and further downgrade in the near future. Van Harn from Rabobank takes a more pessimistic view, declaring a rating downgrade probable. He foresees that the austere measures’ negative impact on growth will make a downgrade by rating agencies highly likely. “Stark austerity has its price. Economic growth, which is already weak, will be hampered by a sharp turn in France’s fiscal stance,” he contends.
France’s ambitious budget plan, while attempting to address its fiscal challenges, carries substantial risks. The political climate, the heavy reliance on tax increases and the potential knock-on effects on economic growth and credit ratings all hang precariously in the balance. The coming months will undoubtedly be crucial in determining whether this gamble pays off or leaves France facing further economic uncertainty.
