The French government, under pressure from the EU over overspending, said on Thursday that a total of 25 billion euros in cuts are needed this year to meet its pledge to get deficits under control.
The government of President Emmanuel Macron, which lost its majority in parliament in Sunday’s snap elections, is being closely watched by the European Commission over its budget deficit and public debt.
Finance Minister Bruno Le Maire told reporters that the total expected cuts this year, worth $27.1 billion, were needed to reduce France’s budget deficit to the government’s target of 5.1 percent of gross domestic product (GDP) for this year, a revision from the previous target of 4.4 percent.
France’s budget deficit last year, 5.5 percent of GDP, was larger than expected due to lower tax revenues.
France, like all other countries in the eurozone, must keep its budget deficit below three percent of GDP.
However, this requirement, agreed by European Union member states under the Stability and Growth Pact, was suspended in 2020 to give countries time to deal with the Covid pandemic and subsequently the economic consequences of Russia’s invasion of Ukraine.
EU member states have now agreed to return to a course that will bring deficits back to normal in the coming years.
The European Commission last month reprimanded France for the poor state of its finances. France has a public debt of more than 110 percent of GDP, almost double the percentage allowed by the EU.
On paper, EU member states can be fined by the Commission for excessive deficits, but this has never happened.
No party won the second round of voting by a landslide on Sunday, although a broad alliance of Socialists, Communists, Greens and the far-left France Unbowed (LFI) won the most seats, with 193 seats in the 577-member National Assembly.
The coalition, the New Popular Front (NFP), is demanding that it be given the task of forming a new government, but Macron is insisting that both the LFI and the far-right Rassemblement National (RN) be excluded from any broad governing coalition.
According to several economists, the NFP’s economic plans, which include reversing Macron’s pension reform and increasing the legal minimum wage, would further increase budget deficits.
The prospect of such policies being implemented weighs on France’s creditworthiness. Buyers of French government bonds are demanding a risk premium of around 65 basis points on French government debt over the German benchmark.
This means that France now has to pay investors a higher return than Portugal, but still less than Spain.
Credit rating agency Standard and Poor’s had already downgraded the credit rating of French government debt from AA to AA in early June, amid concerns about lower-than-expected growth.
Le Maire has promised that France’s budget deficit will be below three percent by 2027.
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