French Budget Sparks Anger Among Leftist-Opposition, Teachers

The French budget for 2025, which aims to reduce the country's deficit with tax hikes and spending cuts of €60 billion, has sparked political pushback. 

New Prime Minister Michel Barnier wants to reverse the country's ballooning national expenditure of €3.2 trillion with austerity measures. But members of Bernier's fragile coalition have criticized the budget. 

Left-wing lawmakers said the measure could affect millions of low-income families, retirees and small businesses. Additionally, French teaching unions threatened that they would strike, describing the cuts as a "bloodbath" in education.

Public spending on social welfare healthcare has driven up government spending, taxes have fallen short of offsetting the deficit. But this has resulted in Europe's second-largest economy failing to keep its deficit below the European Union's (EU) target of 3% of GDP. 

France Debt to GDP, Source:  Statista

French Budget Faces Opposition In Parliament

The French budget plan will undoubtedly face opposition in parliament from the New Popular Front (NPF), a coalition member of President Emmanuel Macron's government. 

Barnier's government survived a vote of no-confidence initiated by the NPF on October 8. The challenge fell short of the 289-vote majority required.

But it also depended on Marine Le Pen's right-wing National Rally party (RN) refraining from joining the far left. A vote of no confidence would have thrown the government into a state of uncertainty reminiscent of the turmoil that followed the snap elections in June and July. 

The uncertainty around the budget outcome, the debt to GDP, and political turmoil have increased the cost of French debt. Government bond yields rose above the Spanish equivalent for the first time since 2007. 

French 10-year bond yield, year-to-date, Source: TradingView

French Budget Includes Corporate Surtax

Barnier is trying to address these concerns with austerity measures. His budget plan includes a temporary surtax on 400 companies whose annual turnover exceeds €1 billion. It will increase the tax rate for individuals earning more than €250,000 or couples earning €500,000 annually.

These measures will garner revenues of €8 billion and €2 billion, respectively, according to government projections. All taxpayers will also pay compulsory taxes on electricity use, which had been previously reduced during the years 2022-2023.

Additionally, the plan would slash budgets for every government ministry in an effort to slice an additional €20 billion combined. The ministries of defense, justice, and the interior are excluded. 

Cuts to welfare and local government funding would be implemented. The budget will also include freezes on pension raises and reductions to the civil service payroll. 

French Budget Is ‘Balanced’

The government wants to reduce its public deficit to 5% of GDP next year from 6.1% this year. It is counting on 1.1% economic growth both this year and next.

However, this figure is still higher than the 3% cap mandated by the European Commission (EC). Current expenditures are around 110% of France's GDP. And these are expected to reach around 115% in 2025. The maximum threshold under EU regulations is 60%.

"We mustn't sacrifice our children's future" by issuing "bad" or "blank checks," Barnier said. The plan is "balanced" and "fair" and will protect "those who work" and "the most vulnerable" from the tax hikes.  .

French Finance Minister Antione Armand has framed this as "a question of international credibility and sovereignty."  The reduction in government spending "has to start now," he said. 

Brussels has implemented correctional procedures against France along with six other EU nations. Barnier's government will submit the budget plans to the EC by the end of the month and outline its strategies to ensure France's economic position.

France's Budget Is Overly Optimistic

France's independent fiscal oversight body has warned the new plan is predicated upon an overly optimistic assumption of future economic growth.

The forecast "is based on favorable assumptions for world trade" and business investment, the High Council of Public Finances said on October 8. It "is fragile due to the optimistic macroeconomic scenario and the scale of the measures to be implemented.

 

French GDP (in US Dollars), Source: Statista

Fitch Ratings on October 11 lowered its outlook on France’s Long-Term Foreign-Currency Issuer Default Rating to Negative from Stable. Fitch forecasted said it sees general government debt rising more steeply, reaching 116.3% by end-2026,

"Fiscal policy risks have increased since our last review," Fitch Ratings said on October 11. "High political fragmentation and a minority government complicate France’s ability to deliver on sustainable fiscal consolidation policies."

French Budget Has Political Headwinds

Lawmakers have expressed mixed sentiments about the French budget. France Unbowed Party's Manuel Bompard denounced the plan as "the most violent austerity plan that this country has ever seen." 

Le Pen has said she and her party wanted "to give a chance" to Barnier and the new government. But she set out red lines, including that any tax increases be offset by increased spending power for the lower and middle classes.

But Barnier could force the budget through in accordance with Article 49.3 of the constitution if parliament rejects the budget.

"I am taking the risk of being unpopular, but I want to be reasonable," he said earlier this month before the budget was delivered. 

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