PARIS (AP) — France’s new government has unveiled its 2025 budget bill, with plans for big tax hikes and spending cuts to tackle the country’s massive budget deficit.
Prime Minister Michel Barnier, a Conservative, described the huge hole in public finances as a “ sword of Damocles That could take the eurozone’s second-largest economy ‘to the brink of collapse’.
Yet his budget plans have angered many in the country and are expected to see fierce debates in parliament in the coming weeks, with the survival of his government at stake.
How did France end up with such a large budget deficit?
France has high levels of public spending thanks to generous social security programs, health care and education – and a heavy tax burden that cannot cover costs. For more than two decades, the country has struggled to keep its budget deficit below the European Union’s target of 3% of gross domestic product (GDP).
France’s debt has increased significantly due to the economic slowdown caused by the COVID-19 pandemic. President Emmanuel Macron applied a “whatever it takes” strategy based on state intervention to save jobs and businesses, including a massive partial unemployment program and subsidized childcare leave.
After the virus crisis, Macron’s former centrist government vowed to get the country’s finances back on track. But budget overruns and lower-than-expected tax revenues dug a bigger hole. The budget deficit this year is expected to reach 6.1% of GDP.
Barnier, appointed in September has promised to reduce this percentage to 5% next year after surprising parliamentary elections.
Why does it matter?
France does under pressure from the executive body of the European Union to reduce its debts. Earlier this year, the EU executive placed this under a formal procedure for countries with excessive debtThis is the first step in a long process before Member States can be contained and pushed to take corrective action.
Barnier decided to postpone the target date for reaching the eurozone’s 3% deficit target from 2027 to 2029.
The situation also affects France’s credibility on the financial markets, causing financing costs to rise sharply.
France “is in the situation of a family living beyond its means,” Bank of France Governor François Villeroy de Galhau said on France Info radio. “Therefore, it needs to reduce its expenses and increase its revenues a little. First of all, we have to control our expenditure, because if you compare France with our European neighbors, we have the same social model, the same public service model, but it costs us much more.”
“We need the effort of almost everyone,” said Villeroy de Galhau.
What is Barnier’s proposed drug?
The Barnier government has unveiled plans for €60 billion in cuts next year. That involves raising taxes – a risky move in a country already known for its heavy tax burden.
The plans include introducing new taxes – presented as temporary – on around 24,000 richest households and on the profits in France of hundreds of major companies.
The bill also aims to increase taxes on electricity, air travel and polluting cars.
The government is also looking for ways to cut spending, including by freezing state pensions for six months next year and reducing support for apprenticeships and subsidized contracts.
France’s generous social security program is also facing cuts, through measures such as cutting medical and sick pay payments.
The defense budget, which was received a big boost after the war in Ukraine, is expected to be preserved.
Who would be most affected by the proposed cuts?
Left-wing lawmakers and opposition unions are criticizing the “austerity budget” as unfair, saying it could have a major impact on millions of low-income families, students, retirees and small businesses.
“The cuts in government spending and the social safety net are having a greater impact on the lives of the working and middle class,” said far-left lawmaker Eric Coquerel, head of the finance committee in the National Assembly.
“Employees and pensioners are again being asked to pay the bill,” said the far-left union CGT.
The CFDT, a more moderate left-wing union, also criticized Barnier’s plans, warning of “a significant deterioration in public services such as education, and a further weakening of our healthcare system.”
Employer unions also warned of the potential impact of tax increases on businesses, including possible job losses. The government’s plans “will result in a sharp increase in costs for businesses,” the Confederation of Small and Medium-sized Enterprises (CPME) said.
A matter of make or break for the government?
The budget battle will be hotly debated in the House of Representatives, where the government coalition does not have a majority.
The French National Assembly is divided into three major blocs: the left-wing New Popular Front, the far-right National Rally Party and Macron’s centrist allies who struck a deal with the conservatives to govern.
Barnier’s budget approach has angered many, including centrists within his own coalition, who see tax cuts as a key requirement for maintaining France’s competitiveness in the world.
Left-wing opposition lawmakers will try to amend the bill next, while some on the far right have criticized plans for major concessions from the lower and middle classes.
With its survival at stake, the government may have to backtrack on some of its planned measures, as losing a vote on the budget would trigger a deep political crisis.
Barnier is forced to rely on the goodwill of the far right to avoid being deposed by a vote of no confidence.
Another option for the government would be to use a special constitutional power to approve the budget without a vote, but that could also trigger a vote of no confidence, with an uncertain outcome.
The budget bill must be approved by the end of the year.
“High political fragmentation and a minority government complicate France’s ability to achieve sustainable fiscal consolidation policies,” ratings agency Fitch said last week as it downgraded France’s outlook from “stable” to “negative.”
