French Plans to Fix ‘Worrying’ Finances Lack Credibility, Auditor Says
(Bloomberg) -- France’s state auditor said existing plans to repair “worrying” public finances lack credibility, sounding the alarm on the budget as political groups with expansive tax-and-spend policies jockey to form a new government after snap elections.
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President Emmanuel Macron’s outgoing administration pledged new spending cuts and revenue-boosting measures in April to get back on course with derailed plans to bring the budget deficit within 3% of economic output in 2027.
State auditor Cour des Comptes said Monday, however, that the updated program relied on “particularly optimistic” growth forecasts, unprecedented spending cuts, and imprecise measures to boost tax revenue. The government also seemed not to have accounted for the depressive impact of such tightening, it said.
“This trajectory doesn’t seem to be very credible or very realistic,” the Cour des Comptes said. “French public finances are therefore in a worrying situation.”
The review is another red flag for the euro area’s second-largest economy, whose next government will need to find more than €15 billion ($16.4 billion) in extra revenue or savings a year to meet European Union demands, according to people with knowledge of the assessment. Under new fiscal rules, Paris is supposed to submit a medium-term plan by mid-September.
“It is clear there is a need for fiscal adjustment in France and in the other countries with high debt,” EU economy chief Paolo Gentiloni told reporters ahead of a meeting of euro-area finance ministers in Brussels.
France’s budget is already shrouded in uncertainty after a turbulent election delivered a hung parliament. At one point during the campaign, the selloff in French bonds drove the premium on the country’s borrowing costs compared with Germany to the highest since the region’s sovereign debt crisis over a decade ago.
While market tensions have since eased as no party won the absolute majority required to have a free rein over the budget, a left-wing coalition called the New Popular Front that pledges a vast increase in public spending is in the ascendancy after taking the largest number of seats.
Asked about the possibility of a new spendthrift administration in Paris, German Finance Minister Christian Lindner warned that all EU member states should respect the bloc’s fiscal rules.
“It’s in our best common interest to maintain sustainability of our public debt, and I think every future French government will have to follow these rules as well,” he told reporters in Brussels.
The New Popular Front would need to water down its proposals in order to form any kind of government capable of commanding a majority in France. Current finance chief Bruno Le Maire has opened the door to building consensus for specific projects, but limited the scope for compromise by warning that the left’s manifesto is a danger for France and that Macron’s plans for fiscal consolidation must not be weakened.
Pierre Moscovici, a former French finance minister who now heads the Cour des Comptes, said there are different possible paths to reducing debt and deficits, but that neither the left nor the right can escape the imperative for action.
“We have fallen behind in the euro zone, which is not good,” he told a news conference. “France is the third-most indebted country, which is not the podium I was dreaming of as the Olympics arrive.”
In a written response to the auditor’s report, Le Maire and Budget Minister Thomas Cazenave said the Finance Ministry shares many of its observations. But they said the government has made unprecedented efforts to correct the budget this year and that the high debt and deficit levels in 2023 were a result of choices to protect economic growth and tackle inflation.
Speaking to journalists on Monday, Le Maire said he contested several elements including the auditor’s forecasts for growth and tax receipts. He also said that Macron’s tax-cut policy had boosted the economy and undermined public finances less than the auditor estimates.
The outgoing finance minister said the current administration is preparing options for his successor for the 2025 budget that would ensure France keeps to its longer-term deficit-reduction commitments.
“The task of repairing public finances has begun with a firm hand, and there should no longer be any deviation from this line,” Le Maire said. “It will be up to the next government to make decisions - my recommendation is to not deviate from the line chosen by this government.”
Even before the election, France was in investor cross-hairs after S&P Global Ratings downgraded the country. In the buildup to the vote, the European Union also instigated a process against Paris that’s designed to enforce greater discipline in member states with excessive debts.
The Cour des Comptes said that France is increasingly diverging from other European countries in its efforts to close down the deficit after the Covid pandemic and energy crisis. Higher debt costs constrain all other spending and investment, and leave France “dangerously exposed” if there is another economic shock, it said.
“It is crucial, as the current stability program foresees, to return the deficit under 3% of economic output and get debt on a downward trajectory” in line with EU rules, the auditor said. “But this effort should be made on the basis of more realistic and more credible forecasts than is the case today.”
--With assistance from James Hirai, Marilen Martin and Sonja Wind.
(Updates with comments from EU commissioner in sixth paragraph, German finance minister starting in ninth paragraph.)
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