French Government Pledges Tough Measures as Deficit Balloons
(Bloomberg) -- France’s new government warned that the budget deficit has widened much more than expected and pledged to take tough action to ensure credibility as rattled investors resumed selling the country’s bonds.
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Just days into their jobs, Finance Minister Antoine Armand and Budget Minister Laurent Saint-Martin faced lawmakers at the National Assembly’s finance committee on Wednesday to explain how they plan to repair public finances that have deteriorated sharply over the summer amid political uncertainty.
“I’m here to speak truthfully and with method,” Saint-Martin said. “The first truth is that in 2024 the public deficit risks exceeding 6% of gross domestic product, according to the latest estimates we have.”
Armand said the 2025 budget, which will be presented in “the week of Oct. 9,” would first and foremost focus on cutting spending that has risen by €200 billion ($223 billion) since 2019. He also said he’s secured a delay to present medium-term fiscal plans to the European Union until Oct. 31.
“France’s credibility is at stake with this budget,” Armand said as he pledged “consequential measures” to repair public finances.
Investors have ditched French assets in recent months amid political turmoil, with the risk premium on the country’s debt approaching its highest since the euro-area crisis. France’s 10-year yield premium over safer German peers jumped three points to 79 basis points, just below the highest level seen in recent days, as the ministers confirmed the wider deficit.
Bank of France Governor Francois Villeroy de Galhau said earlier on Wednesday that it’s urgent for the country to deal with its deficit and debt challenges as bond markets are increasingly sending warnings about the risks.
Under pressure to find quick solutions, the new government of Prime Minister Michel Barnier has indicated it could raise taxes as well as cut spending. Such a move would break with President Emmanuel Macron’s pro-business mantra of not increasing levies on businesses and households.
Saint-Martin said he would organize a debate on tax fairness with lawmakers, and both ministers said they would avoid levies that hurt the middle classes and least well-off.
“We won’t be the government of unjustified tax,” Armand said. “But we can’t exclude thinking about targeted and exceptional taxes on companies and French people who have a capacity to contribute.”
Political Uncertainty
Saint-Martin said the deficit in 2024 is no longer on track to meet a previous target of 5.1% of economic output because tax revenue was much lower, notably since growth is coming mainly from exports rather than domestic demand.
He also said political uncertainty after Macron called snap elections in June has made companies hesitant to invest and that spending by local authorities is on track to be around €16 billion higher than expected this year.
Armand said the economy remains “robust” and slightly revised up the growth forecast for 2024 to 1.1% from 1% previously. But he said that would not solve the fiscal problems.
“This growth is insufficient to give us a margin for maneuver on the budget,” he said.
--With assistance from Alice Gledhill and James Hirai.
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