France will close the year by seriously challenging Germany for the title of sick man of Europe. Paris will, however, be the undisputed winner with regard to its public deficit, since in 2024 it will display its highest level since the start of the European risk premium crisis, in 2010-2011 (excluding the exception represented by the pandemic). . The neighboring country plans to end this year with a deficit in its public accounts equivalent to 6% of GDP.
The Gauls are in a difficult situation since, according to the latest OECD data, their growth will only be 0.7%. A cocktail unfavorable which brings down the Olympic euphoria of Paris like a soufflé.
The new government, led by the conservative Michel Barnier, has deployed the entire economic machine of the country to correct this situation and avoid a budgetary debacle in the second largest economy in the euro zone.
This week, Barnier and his Ministers of Finance and Budget, Antonie Armand and Laurent Saint-Martin, will present to the National Assembly (Lower House) their draft budget for 2025 in which they propose a savings plan of 60 billion dinars. euros, according to an official. informed sources elEconomista.es.
In his opening speech to the National Assembly, the conservative Michel Barnier assured that two thirds of this budgetary effort would come from “cuts in public spending”, i.e. almost 40 billion euroswhile the rest (less than 20 billion) will come from increasing taxes on large companies and fortunes, among others. Antonie Armand assured in several interviews that this tax increase would be “temporary”.
Attal’s legacy
The previous executive, led by Gabriel Attal and with Bruno Le Maire at the head of the Ministry of Finance (Bercy), leaves a legacy to the new government “much worse than what he told us”, official sources assured. elEconomista.es.
At the end of last April, Le Maire’s forecasts spoke of an objective of reducing the public deficit to 2.7% until 2027 and of contracting the public deficit. the volume of public debt increased to 108.3%. The way to achieve this would be to reduce, solely and exclusively, public spending, while lowering taxes left and right. “The best way to reduce the debt is to increase national wealth,” Le Maire said at the time. He was very sure of his calculations, or at least that’s how he seemed.
But the start of the year and the tax close brought huge surprises and updated the accounts of the Bercy dairy. France closed the year 2023 with an overdraft in its accounts of 154 billion euros, which represents 5.5% of the country’s GDP, while the ministry had set a target of 4.9%.
The debt also surprised greatly by standing at 147.4 billion euros, or 110.6% of GDP, when Bercy’s estimates were 109.7%.
The big burden came from income. Bruno Le Maire did not expect this weakness. Income from corporate tax and VAT, Social security contributions and personal income tax were “disappointing,” said Charlotte Montpellier, senior economist at ING Economics for France and Switzerland, in a report to clients.
Macron’s image has continued to deteriorate, as the European elections of June 9 showed. The far-right Ressemblance Nacional (National Regroupment) party of Marine Lepen and Jordan Bardella won the municipal elections with 31.5% of the vote.
After these results, Macron had no choice but to dissolve the National Assembly and call legislative elections. Result: a very fragmented Parliament, without legislative majorities, with a Government which will have great difficulty in carrying out this budgetary project which will be presented on October 10.
Amidst all this, Attal’s management continued under the mantra of lower taxes and the markets continued to react against this, to the point where ten-year Portuguese or Spanish bonds were more profitable than French bonds.
At the end of September, a historic event occurred on the trading floors. For the first time in 16 years, they demanded that French debt be more profitable than Spanish debt. Concretely, 10-year French bonds were being traded – on September 26 – with a profitability of 2.965% compared to 2.938% of the Spaniards. This brought the risk premium (difference with the German bond) to 80 points in the neighboring country, compared to 78.1 on the Madrid stock exchange.
Savings and more savings
The plan that Barnier will present this week to the Assembly is that of a significant reduction in public spending to correct the deficit to 5% by 2025 and achieve the objective of 3% of GDP in 2029. Even if Brussels l demands in 2027, from Paris, they have confidence in the flexibility of the new European budgetary plan.
“The first remedy for the debt is to reduce spending. In 2025, two thirds of the recovery effort will come from this,” Mr Barnier said. The head of government declared that he wanted to “drive out duplicity, inefficiencies, fraud, abuse of the system and unjustified rents”. The French must “get value for their money,” declared the Prime Minister.
But, in addition to reducing public spending, Matignon (as the seat of the French government is called) “will also request participation from large companies which obtain significant profits” and “an exceptional contribution to the richest French people”, through a series of temporary tax measures.
With this reduction in public spending, state exemptions on GDP would increase from 56.8% this year to 56.3% in 2025. However, this is still the highest public spending in the EU, with an average of 49%. Since 2019, French public spending has increased by 200 billion and last year alone it increased by 16 billion, as Le Maire reported at the time.
These budgets that the French government will present provide GDP growth of 1.1% in 2025 after 1.1% that it forecasts in 2024, very far from the OECD calculations. On the other hand, average inflation would be 1.8%, compared to 2.1% on average this year. As for spending, they expect it to amount to 1.7 billion euros next year and they plan to raise 1.56 billion.
Solidarity
The Minister of the Budget (the equivalent of the head of the Treasury in Spain), Laurent Saint-Martin (macronist), announced in an interview on public television France 2 the profile of the “lucky French people” who will make this “exceptional contribution”. with the tax on large fortunes. Thus, the rate will be applied to income taxed “above 500,000 euros” in personal income tax per year.
“We can legitimately ask the richest taxpayers in this country to participate exceptionally and temporarily in this recovery effort,” said Saint-Martin in the Télématin interview.
The minister reiterated that this serves to “show that the growth policy, the investment policy, has borne fruit since 2017, which means that we have reduced unemployment, that we have opened more factories than we “We have closed some, it must continue.”
Generally speaking, and despite the difficult economic situation the country is going through, employment has remained resilient in France. In the second quarter of this year, according to data from the National Institute of Statistics and Economic Studies (INSEE), the unemployment rate fell by 0.2%, to 2.3 million people. This represents a decrease of 40,000 people compared to the first three months of the year and places the unemployment rate in France at 7.3%.
Asked what mechanism the Executive would use to address this new tax rate, the minister was unable to specify how he would implement it. “We will see what mechanism we adopt,” he said. However, he recalled that this type of temporary measures had already been adopted “during the financial crisis of 2008”.
Without going through the Assembly
Barnier trusts his career as a negotiator, it must be taken into account that he was responsible for leading the negotiations between the EU and the United Kingdom after Brexit, although it is clear that this is all going to be a debate difficult, since he does not have a majority in the Lower House.
Despite everything, in the absence of consensus, it is possible to resort to the constitutional tool which avoids the vote, as was used during the pension reform. The Magna Carta allows the text to be approved directly after prior deliberation by the Council of Ministers. This article specifies that approval can only be revoked if “a motion of censure is presented within 24 hours”. The condition is that this motion is signed by at least one tenth of the National Assembly.
Antonie Armand keeps repeating that temporary tax increases “will only concern” the richest classes in the country and businesses with a significant volume of income. In an interview with private radio RTL last Wednesday, the head of the Economy reiterated that personal income tax rates will not be changed and that taxes will not be increased “for the middle classes” .
A tax increase of 20 billion which is not enough to respect Brussels
The enormous budgetary problem in Paris is forcing the government to postpone by two years the objective of a deficit of less than 3% of GDP. According to budgetary rules set by Brussels, member countries must limit their red numbers before 2027.
Even if the new French executive has set to work to correct the significant deficit with this savings plan of more than 60 billion euros by 2025, the overdraft in its accounts will close, according to the president’s own assessments. government, at around 5% of GDP.
In his speech to the National Assembly, Barnier assured that two thirds of this budgetary effort would come from “reductions in public spending” (40 billion) while the rest (less than 20 billion) would come from taxes. The mechanism they are going to use to collect all this money is based on taxes from big businesses and the wealthy.
Little is known about the details of this plan. What elEconomista.es was able to learn, from official sources, is that they will postpone the revaluation of pensions from January 1, 2025 to July 1 to relieve Social Security.
The head of the Economy of the TF1 television channel declared that postponing the indexation of pensions until July 1 means saving six months, which represents “a total of 4 billion euros, of which the State receives the majority, or around 3 billion.
The expert stressed that this is “a significant contribution to the efforts that we will have to make next year, as the State looks for a way to save billions of euros.” At the start of this year, basic pensions increased by 5.3% when indexed to the CPI.
In the newspaper Le Parisien, it is explained that Barnier wants to triple the exceptional contribution for the richest with which he hopes to raise 3 billion euros. At the same time, the tax rate for large companies that earn more than 1 billion euros will increase from 25% to 33%, with which they intend to collect up to 8 billion euros. To this must be added a 3 billion increase in the electricity tax and an additional 3 billion for energy companies and share buybacks.
In the case of large fortunes, the Minister of the Budget, Laurent Saint-Martin, announced that this measure would affect “around 65,000 families” whose members, as a whole and not individually, pay taxes of more than 500 billion annual euros. This means that this imposition, which all members of the government are trying to emphasize as being “temporary”, will affect 0.3% of the 20 million French taxpayers who pay the tax.
On the other hand, health spending (which in France depends on Social Security) will also be reduced from 3.2% of GDP this year to 2.8% in 2025.
