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France’s new prime minister Michel Barnier has warned that repairing the country’s degraded public finances will require a years-long “collective effort” as he announced “temporary, targeted” tax hikes on large companies and the wealthy.
“The sword of Damocles above our heads is our colossal debts,” Barnier told the National Assembly in a speech on Tuesday that laid out his governing agenda. “If we do not act, our country will be on the edge of the precipice,” he said, adding that annual interest costs would soon dwarf spending on education and defence.
Barnier’s decision to propose a budget next week that will include tax increases is a major break with the economic policies espoused by President Emmanuel Macron, whose governments have lowered taxes since 2017 in an effort to boost growth and competitiveness.
It is also a sign of how much the political landscape has shifted since snap legislative elections this summer that led Macron to lose control over the assembly and usher in an awkward power-sharing government with Barnier and the conservative Les Républicains party.
Barnier faces the tough task of cleaning up public finances at a time when opposition parties in a hung parliament are already threatening to bring down his government. Marine Le Pen’s far-right Rassemblement National, which nearly doubled its seats in the snap election, has emerged as a pivotal party since its backing would probably be needed for a no-confidence vote to pass.
Without a majority Barnier will struggle to pass structural reforms, and some parties even want to undo previous ones, such as Macron’s increase of the retirement age last year. Some centrists in Macron’s coalition who support Barnier’s government have criticised the U-turn on tax increases.
“Confronted with our immense challenges we don’t have a choice: our responsibility is to alleviate the debt burden and find margins of manoeuvre again on the budget,” Barnier said as opposition lawmakers shouted over him.
France will push back its goal of cutting its public deficit to 3 per cent of output to 2029 instead of 2027 — a shift that it will have to negotiate with Brussels, which has already placed the EU’s second-largest economy in what is called an excessive-deficit procedure.
Mujtaba Rahman of the Eurasia Group consultancy said Barnier was seeking to turn the fiscal crisis to his advantage “by painting the situation as very black” in an effort to force MPs to act responsibly on the budget.
“Barnier is seeking to establish his credentials as an independent, new force in French politics by blaming Macron and his successive governments since 2017 for leading France into such a fiscal impasse,” he said.
Finance ministry officials have previously said €25bn-€30bn in spending cuts and tax rises would be needed next year, although Barnier did not specify the amounts. But he did say that “one-third” of the effort would come from new taxes, while the rest would come from spending cuts in areas such as education and health.
“The first remedy for debt is public spending cuts,” Barnier said. “Reducing spending means giving up magic money, the illusion of everything being free and the temptation to subsidise everything.”
France has far overshot its targets this year, with the deficit expected to hit about 6 per cent of gross domestic product, far higher than the 5.1 per cent goal and the 2023 level of 5.5 per cent. Barnier set a goal for the deficit to reach 5 per cent of GDP by end-2025.
Investors are worried about the government’s ability to plug deficits. French borrowing costs recently rose to levels similar to Spain and Greece for the first time in decades. S&P Global downgraded France in May, while three more reviews from rating agencies are expected.
Le Pen said the RN would not immediately censure the government but she laid out “red lines” that could change its stance. She also demanded action on her priorities, such as funnelling revenues from tax increases on the rich to help low-income people and curbing immigration.
“This spirit of openness should not be interpreted as a blank cheque nor a form of allegiance to a government that we consider is based more on convenience than conviction,” she said.
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