France is unlikely to meet its goals of reducing public debt in 2026 and lowering the fiscal deficit to below 3% of GDP by 2027 (Figure 1) when President Emmanuel Macron’s second term in office is due to conclude. This reflects rising interest payments, the emergency government spending introduced as response to worsening economic conditions linked to Russia’s war in the Ukraine, and structural medium-run spending pressures.
President Macron enjoys broad political support for implementation of emergency measures to shield households and companies from economic slowdown and rising inflation, and to accelerate investment in energy infrastructure and the military. However, political disagreement persists around his plan for reinvestments in France’s nuclear-energy sector and pension reform.
Figure 1. Moderate growth and sustained deficits pose challenge to France’s debt reduction
Government will find it harder to put together a majority of deputies in support of supply-side reform
With approval of the purchasing power package by the National Assembly on 22 July, the President’s coalition known as “Ensemble” passed its first test after having lost its absolute majority in legislative elections of June.
However, the government will find it harder to put together a majority of deputies backing supply-side oriented measures anchoring productivity and competitiveness. Even so, the ruling coalition could find ground for agreement with the centre-right – Les Républicains – to contain public expenditure.
Measures in the purchasing power package include an increase of basic retirement and disability pensions by 4% from 1 July 2022 and a cap on increases of housing rent from an index level of 3.5% between July 2022 to June 2023. The law also creates a legal framework for restarting temporarily a coal-fired power plant and allows a rise of caps for greenhouse gas emissions in cases of “a threat to the security of the electricity supply”. The purchasing power package costs EUR 20bn (or about 1% of GDP).
Challenge in offsetting extra spending through budget tightening elsewhere
The challenge for government is that the room to offset some of this further spending through tighter budgeting elsewhere appears narrow despite introduction of an enhanced governance framework for public finances in December 2021 for which the objective is to strengthen multiannual management and budgetary accountability.
France has a weak record in fiscal consolidation over a past 40 years, running persistent budget deficits. Rising interest rates could further impede government plans to start reducing public debt by year 2026. The government’s interest burden is running at 1.2% of GDP and will rise to around 2.0% of GDP medium term.
At the same time, longer-run investment is on the rise as response to Russia’s increased threat to European security. The government is taking back full ownership of Électricité de France SA at an estimated cost of EUR 10bn, with the utility central to France’s proposed EUR 50bn nuclear-energy investment programme.
The government is as well considering an increase of the defence budget by 2030 beyond a current objective of EUR 50bn by 2025 – equivalent to about 2% of GDP – compared with EUR 36bn as of 2019.
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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.