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France will cut public spending only slightly next year and faces rising interest costs on its heavy national debt, raising questions about the government’s ability to clean up public finances.
The proposed 2024 budget unveiled on Wednesday includes €16bn of savings to reduce the deficit to 4.4 per cent of economic output from 4.9 per cent this year — which would still be above the EU rule of 3 per cent of gross domestic product that some other countries have managed to reach.
To achieve the savings, the French government said it would pare back generous subsidies that protected households from rising energy costs, delay tax cuts for corporations and trim unemployment benefits, among other measures.
But the budget also includes €7bn in new spending to advance the green transition and cut carbon emissions — a second-term priority for Macron — showing the challenges his government faces to spend less while investing for the future. The government will also spend to blunt the pain of inflation, such as by increasing pensions for elderly people and benefits for the poor, and it is forgoing €6bn of potential revenue by pegging income tax thresholds to inflation.
“This budget represents a notable effort, and is the first step on the trajectory of an ambitious plan to restore our public finances,” finance minister Bruno Le Maire said at a news conference. He defended the approach as a balanced one that would encourage economic growth and boost employment, while avoiding the pitfall of austerity measures.
Yet there has been criticism that France is not cutting public spending quickly enough. The council for monitoring public finances (HCFP) warned that government growth forecasts underpinning the budget were overly optimistic and criticised the lack of structural spending cuts.
“The medium-term sustainability of public finances therefore continues to call for the greatest vigilance,” HCFP said on Wednesday.
France’s credit rating was downgraded by Fitch in April, and it remains on a negative outlook with S&P Global Ratings for the next review set for December.
Other European countries are cutting deficits faster than France after several years where governments spent heavily to help citizens and companies through the Covid-19 pandemic and the energy crisis sparked by the war in Ukraine. France aims to bring public deficits back under 3 per cent of national output by 2027, while others such as Germany, Greece and the Netherlands are already there.
Rising borrowing costs and slowing growth are squeezing the fiscal headroom of France, which is on track to have one of the biggest budget deficits in the eurozone next year. France’s 10-year bond yield hit a 12-year high of 3.35 per cent on Wednesday.
The cost of supporting France’s more than €3tn in government debt is mounting and expected to exceed €70bn by 2027, up from about €50bn this year and €20bn in 2021. In comparison, the annual defence budget is €46bn and education is €75bn.
“If we do nothing, the explosion of debt will paralyse government action, strangle it,” Pierre Moscovici, who heads France’s Court of Audit, told L’Express magazine. “The government has at last woken up to the problem. Now we need to go from speeches to a broad mobilisation.”
Sachs said in a recent note to clients that France faced “an increasingly challenging macro backdrop for fiscal policy” as growth slowed and interest costs climbed.
“We continue to think France’s consolidation path looks late relative to European peers,” said Goldman, adding that the recent downgrade of France’s credit rating by Fitch and “dwindling demand” from Japanese investors for French debt “have been top of mind for government officials” in Paris.
Japanese investors own a relatively large amount of French government bonds and some analysts think they may start to shift money back to their domestic market as the Bank of Japan begins to undo its ultra-loose monetary policy.
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