French Premier Bids to Break Budget Impasse With Concessions
(Bloomberg) -- France’s Prime Minister Francois Bayrou said he would open the contested 2023 pension reform to renegotiation as he seeks the backing of lawmakers to stay in power and urgently adopt a budget.
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The premier said labor and business unions will be tasked with negotiating changes that could include halting the planned increase in the minimum retirement age to 64.
Any potential modifications must not worsen the financial balance of the vast public system, and should three-months of talks fail, the current plan will apply, Bayrou added.
“The first emergency is to respond to the question of pensions that is dominating public debate,” he said in a policy speech at the National Assembly. “We can look for a path for new reform, with no totems and no taboos.”
Bayrou was appointed last month after his predecessor, Michel Barnier, was toppled when opposition parties from the left and the far-right joined forces in a no-confidence vote over the 2025 budget.
To avoid falling at the same hurdle, the new premier and his minority government have aimed to convince lawmakers in a divided parliament to abstain in repeats of such ballots.
The concessions offered by Bayrou confirm his effort to strike a deal with moderates in the leftist New Popular Front alliance in the National Assembly that would ensure their abstention in no-confidence votes. Similar attempts by Barnier to reach an understanding with Marine Le Pen’s far right backfired.
The far-left France Unbowed said it would propose a no-confidence motion after the prime minister spoke at the National Assembly.
Before Bayrou spoke on Tuesday, the head of the Socialists, Olivier Faure, said his party may have been nearing an agreement not to censure Bayrou over the budget, depending on his commitments on pensions.
However, Bayrou’s proposal appeared to stop short of Faure’s initial demand for a suspension of French President Emmanuel Macron’s flagship 2023 law that raised the minimum retirement age to 64 from 62, making it unclear how the Socialists would respond.
Bayrou also gave more details on how he plans to adopt a 2025 budget to urgently rein in gaping deficits. The previous fiscal plan was rejected with the collapse Barnier’s government when he tried to push €60 billion ($61.2 billion) in tax increases and spending cuts through parliament to bring the deficit down to 5% of economic output from around 6.1% in 2024.
Bayrou set out a less ambitious target of a gap at 5.4% this year, based on “significant savings.” But the new French premier said businesses should not face “exponential” tax increases, and pledged a “notable” increase in healthcare spending.
He also reduced the economic growth forecast for this year to 0.9% from 1.1% as activity is faltering amid the prolonged uncertainty.
France’s 10-year yield premium over Germany, a widely watched measure of risk, held about two basis points lower through Bayrou’s speech.
Still, the spread remains elevated above 80 basis points, roughly twice where it was before Macron called snap elections last year as investors demand higher compensation to hold French bonds.
Bayrou’s economic proposals will test the leniency of the European Union in the application of new fiscal rules that are designed to bring deficits back below the limit of 3% of economic output. Part of the European Commission’s assessment of compliance is based on a country’s efforts to undertake structural overhauls of its economy, including by changes to pension systems.
The new approach to the budget and economic policy will also be closely watched by investors, who have dumped French assets amid the political instability and fiscal uncertainty of recent months.
“We must pull ourselves together and adopt without delay the budgets for the state and the social security system,” Bayrou said. “We are all paying a high price for this budgetary uncertainty: businesses, investors, families, taxpayers and borrowers.”
If Bayrou is able to reach a deal with the Socialists, that could provide reassurance that France will at least have a budget. But if the budget efforts are judged too meager, doubts will persist among investors over whether rising public debt can be curtailed.
Potential changes to the pension system are a significant part of the calculation. According to the government, the cost of abolishing reforms including Macron’s increase of the minimum retirement age to 64 from 62 could be around €3 billion next year and almost €15 billion in 2030.
Bloomberg Economics estimates that halting the reform could create a 1.2% hit to GDP by 2050 and lift the debt ratio by almost 15 percentage points.
The 2023 pension reform, which sparked mass protests, has left Macron and his party deeply unpopular with French voters and overshadowed his second five-year term. But undoing it would mark an emblematic reversal of a centerpiece of Macron’s pro-business legacy that he says is vital to boosting employment and halting the build-up of deficits in France’s vast social security system.
Bayrou is also walking a political tightrope with concessions because pleasing the center-left could come at the cost of support from a small group of center-right lawmakers who have refused tax increases or the suspension of the application of Macron’s pension reform.
--With assistance from Alice Gledhill.
(Updates with additions from Bayrou’s speech and markets reaction)
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