The French government announced its budget proposal for 2025 on Thursday, which incorporates 60 billion euros (approximately $65.6 billion) in increased taxes and spending reductions. Experts, however, caution that these steps might not suffice to avert a potential downgrade of the economy.
This budget places a stronger emphasis on tax hikes than many had anticipated. Analysts highlighted concerns over “politically sensitive” initiatives, including postponing pension inflation adjustments and cuts to local government funding, civil servant salaries, and healthcare services.
Key components of the proposal include temporary taxes on major shipping firms and businesses earning over €1 billion annually, impacting about 440 companies. Additionally, an extra income tax will be imposed on households earning more than €500,000, alongside the reintroduction of electricity consumption tax, and increased charges and taxes on airline tickets and for high-emission vehicles.
A primary goal of this budget plan is to reduce France’s anticipated budget deficit of 6.1% in 2024 down to 5% of GDP in 2025, as striving to meet European Union standards requires member states to keep their deficits below 3%.
The administration aims to reach this target by 2029, extending the previous goal set for 2027. It was also warned that without decisive action, next year’s budget deficit could escalate to 7%.
Political Hurdles
Hadrian Camatte, a senior economist focusing on France, Belgium, and the eurozone at Natixis, stated the challenge of sourcing 60 billion euros within a single year leaves the government with limited choices, leading to the need for “politically complex” strategies. In an interview with CNBC’s “Squawk Box Europe,” he expressed concerns regarding the government’s ability to fulfill this fiscal obligation.
Meanwhile, Prime Minister Michel Barnier’s administration has already confronted a no-confidence vote this week, though it managed to maintain its position.
This government was established last month after challenging negotiations that followed the parliamentary elections in July, where no single party or coalition managed to gain a majority due to a splintered assembly.
Recognizing the challenges, Mr. Barnier described the budget as an initial framework for discussions among members of parliament and indicated openness to amendments for the sake of fiscal health.
The discussions concerning the budget are set to commence on October 21, with various sections scheduled for voting on October 29.
“The challenge is that we need to locate 60 billion, which has never been achieved within a year. This is an unprecedented situation, making it quite unstable when there’s just a relative majority in play,” added Mr. Camatte.
Emphasis on Taxation
A note from Goldman Sachs analyzed that the fiscal framework of the 2025 budget leans “more towards tax hikes rather than spending cuts than previously expected.”
“Considering the magnitude of the suggested fiscal adjustments and the reliance on tax increases, we have little faith that the government can meet its 2025 budget deficit target of 5.0%. Our past analyses indicate that fiscal consolidation mainly through rapid tax increments is unlikely to yield sustainable improvements,” the analysts remarked, noting their own forecast of a 5.2% deficit.
Nonetheless, they observed a glimmer of potential short-term political stability following the government’s survival in a no-confidence situation on October 8.
France’s Minister of Economy, Finance and Industry, Antoine Armand, attending the cabinet meeting at the Élysée Presidential Palace where the 2025 budget was presented in Paris on October 10, 2024.
Ludovic Marin | AFP | Getty Images
The base case predicts the government will finalize the budget before year-end, although uncertainties are anticipated thereafter. According to Camatte, France holds the second-highest wage tax in Europe, stating, “If we urgently need additional revenue, raising taxes is our only option. However, the tax burden in France is already very significant; it ranks among the highest in Europe.”
Despite the focus on tax increases, the proposed budget is expected to reduce governmental expenditures by 40 billion euros and enhance revenue by 20 billion euros, according to Rabobank’s senior macro strategist, Eric Jan van Haan.
Nonetheless, he cautioned, “Mr. Barnier’s ambitious initiatives carry implementation risks. The government has committed to the 2029 timeline, but the likelihood of lasting that long is quite low.”
Risks to Credit Rating
The implications of the 2025 budget for France’s economic growth raise questions about whether the country can dodge further downgrades to its national debt rating, following recent cuts by S&P and Fitch over the past two years.
Evelyn Harman, a European economist at Bank of America Global Research, noted on CNBC’s “Squawk Box Europe” that governments are expanding efforts to limit negative effects on economic growth.
“By doing so, particularly targeting high-income groups and significantly profitable businesses, and committing to make these measures temporary, it may help mitigate the usual adverse impact on growth.” she added.
However, Goldman Sachs analysts forecast a shift in economic growth impact, from a boost of 0.3 percentage points in 2024 to a potential decline of 0.5 percentage points in 2025 and 2026 due to these policies. Concurrently, UBS has stated that such a large-scale fiscal consolidation of 2% of GDP is “very likely to suppress growth.”
This week, the Insee statistics agency predicted a 1.1% growth rate for France, but Camatte of Natixis believes “this may be overly optimistic, if not unrealistic.”
“I am concerned about the trajectory of France after 2025. There are no established plans to mitigate the budget deficit post-2025, and our analyses on fiscal sustainability indicate increased risks,” he emphasized.
Camatte also noted that negative assessments from S&P and Fitch can’t be dismissed, but the lack of specific details in the budget might lead credit ratings agencies to adopt a wait-and-see stance for now.
“Let’s maintain a calm perspective for the time being and evaluate next year whether the spending reductions hold credibility,” he added. However, he anticipates that Moody’s may downgrade their outlook on France this year and could follow up with a downgrade next year.
Rabobank’s Van Haan expressed even greater concern, suggesting that drastic spending cuts may “hinder economic growth” and that “a downgrade from a major rating agency is quite likely.”
“Severe austerity comes with significant costs. Diminished economic growth due to a drastic shift in France’s fiscal policies is expected. It’s essential for governments to consider the economic repercussions of their decisions; the lack of political capital poses risks to economic prosperity,” he stated on Friday. “Mr. Barnier might be forced into difficult decisions.”
“Given the hazards outlined by Fitch and the relative optimism of prior forecasts, the likelihood of a downgrade is high, though the market seems to have largely anticipated such a move,” he concluded.
— Contributions by Charlotte Reid from CNBC
