French Prime Minister Under Pressure Over Budget Crisis

By Leigh Thomas

PARIS (Reuters) – French Prime Minister Michel Barnier came under pressure on Wednesday to clarify how he will plug a gaping hole in the public finances as the central bank and public audit office warned that spending cuts and tax hikes are inevitable.

Barnier only took office earlier this month but already finds himself facing a growing budget crisis as tax income comes in weaker than expected and spending is higher than planned, pushing France’s deficit reduction targets out of reach.

“The budget situation that I have discovered is extremely dire,” Barnier said in a statement, adding that he was seeking more information to establish the “exact reality”.

Barnier, a veteran conservative politician and former EU Brexit negotiator, is running out of time to name a finance minister and hand lawmakers a 2025 budget bill, which the law in theory requires by October 1, although some flexibility is possible.

But to rein in France’s worse than expected budget deficit, Barnier must tread carefully to not irritate opposition parties who could unite to topple his government with a no-confidence motion in the deeply divided parliament.

Tough Choices

Barnier’s options are straightforward – cut spending, raise taxes, or take more time to cut the deficit – but calibrating the mix to appease opposition lawmakers is hugely complex.

The least politically contentious option is to seek more time from the European Commission and France’s EU partners to bring its deficit in line with the bloc’s 3% of GDP limit, extending the deadline beyond the current 2027 target.

The head of the public audit office, Pierre Moscovici, said that sticking with the current 2027 target to meet the EU limit would require 100 billion euros ($111 billion) in spending cuts, severely impacting growth in the euro zone’s second-largest economy.

“We need to be more realistic, it seems to me. I think the European Commission would always prefer the truth to be told and that targets are realistic rather than untenable,” Moscovici said.

Moscovici, a former EU economics commissioner, advocated for targeted budget savings rather than broad cuts and mentioned that France has little room to raise taxes further as they are already among the highest in the world.

In addition to seeking a time extension, central bank governor Francois Villeroy de Galhau suggested that the deficit-reduction strategy should consist of three-quarters from budget savings and one-quarter from tax increases.

However, Barnier’s own conservative Republicains party stated that tax hikes are a red line, and even some of President Emmanuel Macron’s lawmakers are reluctant to roll back his legacy of tax cuts.

Outgoing Interior Minister Gerald Darmanin said he could not support a government that implements tax hikes when he returns to parliament as a lawmaker in Macron’s camp.

“Let’s not break the economic machine, taxes are an easy way out,” Darmanin said on France 2 television. “We think budget cuts also have to be found.”

Macron has reduced the French tax burden by 55 billion euros since he took office in 2017, which left-wing parties argue has been a boon to the wealthy and big companies and should now be reversed.

“Completely excluding tax hikes is not realistic,” Villeroy told BFM TV on Wednesday, adding that an “exceptional effort” should not be dismissed from corporate and wealthy taxpayers as long as the deficit is above 3% of GDP.

Barnier has been ambiguous regarding his stance, stating shortly after his appointment that France needs more tax justice and saying on Wednesday that taxes are already heavy.

“My objective is to return to growth and improve the French people’s standards of living at a time when we are already the country where the tax burden is the highest,” Barnier said.

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