France's budget deficit is a serious problem. But although everyone knows about its existence, no one wants to talk about it. In the meantime, President Macron has been busy looking for a prime minister after the snap elections in early July. And so it came to the point that the newly appointed Prime Minister Michel Barnier, for the first time in French history, missed the October 1 deadline for submitting next year's budget to parliament.
“A sword of Damocles hangs over our heads - and it could lead us to the brink,” said Barnier in his opening speech to the National Assembly. Meanwhile, the EU has asked France to present a strategy on how it will reduce its budget deficit - as it is expected to reach six percent this year, which is twice as much as is allowed for the stability of the euro.
The pandemic factor
Currently, France's debts amount to 3.2 trillion euros, which is 110 percent of GDP with an allowable 60 percent. At the beginning of Macron's first term in 2017, the debts were still 2.2 trillion euros. According to economist Professor Michel Rumy, this is mainly due to two factors. “During the pandemic, the government supported households and companies with a lot of money,” he told DW. “In addition, electricity prices have been kept artificially low through subsidies after they rose sharply as a result of Russia's offensive war against Ukraine."
The government is financing these costs with debts on which it pays interest. But according to economist Henri Sterdian, Macron's general policy line on the budget is also to blame for the current situation. “He cut taxes - mainly for businesses, but also for households - by more than 60 billion euros. He assured that this could be financed through higher growth and additional revenues. But the government has definitely overestimated growth,", the expert adds.
Less spending, higher taxes
Prime Minister Barnier intends to present to parliament on October 10 a plan that envisages reducing the deficit next year to five percent and by 2029 to three percent. Two-thirds of the savings must be achieved by cutting spending. At the same time, higher taxes are planned for the rich, for companies with very high profits and for capital gains. Tax evasion - such as from rents - must be put to an end. Economist Rumi is convinced that this approach is correct. “Reducing spending is more certain - if, for example, subsidies for education are reduced, as Barnier wants. But there is no certainty whether the expected tax revenues will actually be obtained. The rich, who are generally very mobile, may go abroad if taxes are increased.”
However, economist Anne-Sophie Alsif has a different opinion: “In France, the engine of growth is private consumption, and 60 percent of government spending is intended for households, who in turn spend this money”, she explains to DW. “Dramatic spending cuts could lead to a recession that would further increase the budget deficit and debt.” However, Alsif agrees that public spending needs to be reorganized. “We need to direct some of it towards productive investment - like the US and China are doing to stimulate growth”.
Will Barnier get parliamentary approval?
The prime minister must push his budget plans through the National Assembly, where his government does not have a majority. The coalition behind Barnier has only 230 out of 577 deputies. Therefore, the prime minister will most likely link the budget vote to paragraph 49.3 of the Constitution - which allows the government to pass laws without a majority. From then on, the opposition could only stop the law with a successful vote of no confidence in the government, and such threats have already been made by the left-wing alliance, which won the elections but is not part of the government. Accordingly, the risk that the government could be overthrown is high. And such political instability would have repercussions throughout the eurozone.
How solid will the budget be?
Jérôme Zettelmeier from the Brussels think tank “Breugel” is more optimistic. “A vote of no confidence in the government will only have a chance if the right-wing party “National Assembly” also supports it, which is unlikely to happen,” he told DW. And so far, there are indeed no indications from “National Assembly” that they intend to vote against the government. “Barnier will certainly present Brussels with a solid plan to reduce the budget deficit. He knows that investors are watching France and has no interest in a sharp conflict with the European Commission.”
The nervousness of the markets was recently manifested in the fact that France, for the first time since 2008, had to pay higher interest rates on long-term loans than Spain. Right now, France does not have a good image among investors, economist Eric Heyer told DW. "No one can understand how the budget deficit forecast was increased from 4.4 percent to six percent, even though growth and inflation are in line with forecasts." Haier also did not rule out the possibility of the government falling during the budget debates.
Author: Lisa Lewis