France’s Fiscal Challenge: Budget Adjustments Ahead

By Leigh Thomas

PARIS (Reuters) – France’s new finance and budget ministers announced on Wednesday their strategy to address the country’s growing fiscal deficit, prioritizing spending cuts before any tax increases. This shift comes as the government faces urgent demands to formulate practical plans to manage the escalating financial shortfall.

Prime Minister Michel Barnier is under pressure to finalize the 2025 budget within days, submitting it to lawmakers by mid-October at the latest.

New Finance Minister Antoine Armand and Budget Minister Laurent Saint-Martin are tasked with finding billions in savings and potential tax increments to address a deficit larger than previously estimated.

Armand emphasized the need for a balanced approach, stating, “The burden will need to be shared. It must firstly come from making an effort on public spending. Everyone will have to take part.”

Saint-Martin expressed concern that the public finances’ shortfall is worse than earlier projections, with the budget deficit potentially exceeding 6% of the GDP, much higher than the previous government’s estimate of 5.1%.

Although economic growth was slightly better than anticipated at 1.1%, it remains insufficient to alleviate fiscal pressures. Both ministers refrained from detailing the 2025 budget or expected deficit reduction timelines, except for plans to present it in the week of October 9.

The former administration aimed to cut the deficit to 3% of GDP by 2027, a goal now deemed unachievable due to low tax revenues and budget mismanagement. Governor of the Bank of France Francois Villeroy de Galhau stated, “Three years is not realistic… but to do it in five years is possible,” advocating for immediate measures to address the deficit.

Credibility at Stake
France’s reputation with financial markets and European Union partners is jeopardized, leading to rising borrowing costs and an excessive deficit procedure initiated by the European Commission. Barnier has indicated willingness to increase taxes on affluent individuals and large corporations—an idea echoed by his ministers.

Vincent de Galhau stressed that spending cuts should constitute two-thirds of the deficit-reduction strategy, with the remaining third sourced from targeted tax increases.

In a positive development, consumer confidence has risen for the third consecutive month in September, surpassing analysts’ expectations, as reported by official INSEE data. An increased number of households believe now is a good time for significant purchases, alongside reduced worries about unemployment, contributing to the highest confidence index since February 2022.

Despite this optimism, investors remain skeptical regarding the new government’s capability to manage the deficit effectively, leading to increased borrowing costs for France, which briefly surpassed Spain’s rates for the first time since 2008.

Villeroy concluded, “France’s international lenders are telling us we need to react.”