France: the party’s over

The day after the new Barnier government presented its 2025 budget, Fitch maintained France’s AA- rating, but with a negative outlook. This follows a deterioration in the public accounts in recent months. While the budget drawn up at the end of 2023 forecast a deficit of 4.4% for that year, the latest projections show a deficit of 6.1% of GDP, almost 2 additional points of GDP. In addition, the public debt is expected to rise to 112.9% of GDP, 3 points higher than in 2023, and further to 115% in 2025, making France one of the most indebted countries after Greece and Italy. Since the beginning of the Macron presidency, public debt has increased by 1,000 billion euros. The deterioration in the public accounts has led to a rise in interest rates on public debt, which are now higher than in Spain and Portugal. How did we get here? Since 2020, public spending has fallen from 61.7% to 56.8% of GDP (which is still high by eurozone standards). In fact, since the beginning of the year, it is public revenues that have collapsed as a result of tax cuts, stagnant consumption (which generates VAT, France’s main tax). To halt this drift (and avoid a debt crisis), the 2025 budget presented on 10 October proposes a fiscal package of €60 billion, or 2% of GDP, including around €40 billion less spending and €20 billion in additional levies. The Cour des Comptes estimates that, on reading this budget, the effort would come mainly from additional taxes and less from spending cuts. Moreover, the assumptions of the budget presented by the government are based on economic growth of 1.1%. However, it is already clear that a fiscal shock of this magnitude is likely to halve GDP growth to just 0.5%, one of the lowest rates in Europe. Household consumption is likely to fall, as is investment. If global growth is weaker than expected, France could fall into recession. So the party really is over.