(Bloomberg) — France plans about €60 billion ($66.4 billion) in spending cuts and tax increases next year, as Prime Minister Michel Barnier tries to reduce a widening budget deficit and boost investor confidence in the country.
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The cuts are needed to reduce the budget deficit to 5% of economic output from about 6.1% this year, government officials said in a briefing to journalists on Wednesday, speaking on condition of anonymity in line with internal rules.
Just over two-thirds of the total will come from cuts to ministries, local governments and the social security system, they said. Just under €20 billion will be generated by temporary tax increases for wealthy individuals and large corporations, as well as higher green taxes.
The excess return investors demand to hold French government bonds over safer German bonds fell by one basis point to 78 basis points after the details of the budget were published, but still remains close to the highest level in more than a decade.
Finding the right balance between the measures in next year’s budget is a delicate challenge for Barnier, whose premiership is weak as his centrist coalition does not have the numbers to counter a concerted opposition attempt to overthrow the government to throw, to repel. Adding to the pressure, investors have dumped French assets in recent months over concerns about the failure of deficit reduction targets and political stability after elections left a hung parliament.
The budget will be presented to the cabinet and parliament on October 10 for debate and possible changes. It is very likely that Barnier will eventually resort to a constitutional tool to bypass a vote, as he does not have a majority and there is a convention in France where opposition lawmakers can oppose any budget bill.
However, if Barnier uses that tool, lawmakers will have another chance to table a vote of no confidence to topple the government. The budget must be approved by the end of the year.
Some lawmakers in the small group backing Barnier’s minority government have warned they will not support tax increases that risk undoing seven years of pro-business policies during Emmanuel Macron’s presidency.
Administration officials reiterated Barnier’s position that tax increases would be calibrated to hit only the largest companies and the wealthiest individuals. But they also said the green tax would increase by around €1.5 billion, with possible measures on fines for high-emission vehicles and charges on the most polluting forms of transport.
The deficit target in the original text presented on October 10 will be 5.2% of GDP, with some measures – including green taxes and €5 billion of planned cuts to state budgets – to be included through amendments during the parliamentary debate entered.
Other steps to reduce spending include delaying pension indexation until July 1 and limiting the increase in healthcare spending to 2.8% – a rate initially set at 3.2% for 2014 .
In total, about half of the €40 billion in cuts will come from limiting the ministries’ budgets. The rest will come from slowing local government spending and cuts in the social security system.
–With help from James Hirai.
(Updates with details of the parliamentary process from the sixth paragraph.)
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