Mujtaba Rahman is the head of Eurasia Group’s Europe practice. He tweets at @Mij_Europe.
French Prime Minister Michel Barnier inherited a deep fiscal crisis, which has only grown deeper during his first month in office.
In his inaugural speech to parliament last week, Barnier tried to turn the fiscal bad news to his political advantage, challenging the disparate and mutually detesting forces within the National Assembly to put country before ideological or factional interests. This is no longer a time for petty quarrels or ideological obsessions, he said. It’s time for concerted, national action to prevent this crisis from becoming a calamity.
Framing the challenge in this way, Barnier was able show he understands the scale of the emergency he’s been confronted with, underscoring that France’s draft budget for 2025 — due to be presented this evening — will be key to restoring the country’s economic credibility, as well as determining the survival of his minority government.
As it stands, France’s fiscal deficit threatens to go well beyond 6 percent of GDP this year — instead of the 4.4 percent promised by the last government. Meanwhile, accumulated French debt has topped €3.2 trillion — or 112 percent of GDP. The country’s now paying higher interest on five-year debt than Spain or Greece. And in the coming months, several rating agencies are due to reconsider its creditworthiness — Fitch on Oct. 11, Moody’s on Oct. 25 and Standard and Poor’s on Nov. 29.
Already facing EU action via an Excessive Deficit Procedure for missing the bloc’s targets, Barnier has now asked Brussels for a two-year postponement of the 2027 deadline to bring deficits below the EU’s 3 percent of GDP ceiling. And he’s announced a new deficit target of 5 percent for next year — abandoning the 4.1 percent that was originally promised by President Emmanuel Macron and former Finance Minister Bruno Le Maire.
But why is France in such a fiscal mess?
Truth is, France has been in the red for half a century. No government has balanced the budget since the mid-1970s, and so the present fiscal crisis is long in the making. Debt had already jumped enormously when President Nicolas Sarkozy was in power after the U.S.-triggered 2008 banking crisis. And during the Macron years, from 2017 to today, the country’s total debt has increased from roughly 100 percent to 112 percent of GDP.
Much of this recent increase can be attributed to the fact that Macron had to confront two global crises in rapid succession — Covid-19, followed by the spike in inflation caused by Russia’s invasion of Ukraine. And these events themselves came after a domestic crisis — the 2018 Yellow Jackets revolt.
Macron’s response to the Yellow Jackets crisis — lower taxes for poorer families and the abolition of a planned hike in gas and diesel taxes — sent his budgetary planning off course. Still, in his first couple years in office, he and Le Maire managed to reduce the deficit and even come within the EU’s limit of 3 percent of GDP. But after that, France’s public deficit started to spin out of control.
During the pandemic, France adopted an “all that it takes” policy — spending to keep the economy alive during protective shutdowns — the cost of which (over €400 billion) exceeded what was spent in other EU countries. The government then pursued a policy of softening the consumer impact of the global spike in energy and other prices triggered by the invasion of Ukraine. Subsidies on pump prices, electricity bills and other handouts cost an estimated €100 billion.
A study by the independent French economic think tank Observatoire français des conjonctures économiques estimates that up to 69 percent of the increase in French debt since 2017 can be attributed to the “all that it takes” response to global crises. Yet another chunk is attributable to Macron’s decision to spend his way out of the Yellow Jackets rebellion in rural and outer suburban France.
Although Macron came to office promising a revolution in French government, he never took the need to reduce the large share of GDP taken up by public spending very seriously. Rather, he believed lower taxes and other market-opening policies would ease the problem by boosting growth. However, as his cuts to taxes had only limited impact on growth — despite positively impacting job creation — they’ve exacerbated issue. Furthermore, public spending hasn’t been reduced pro rata either. In fact, in some areas like defense, education and health, it’s increased.
Looking to today, the acute crisis of the last 10 months partly arose because revenue from taxation during the 2023 to 2024 period didn’t match official forecasts — despite the French economy outpacing Germany’s with a predicted growth rate of 1.1 percent of GDP. The shift in revenue figures was, in itself, modest. But after 50 years of overspending and the triple crises between 2007 to 2022, France has run out of room for further maneuver.
Therefore, Barnier’s main political challenge — and risk — is getting France’s fiscal house in order. But can he do it? And how?
Two-thirds of the deficit-cutting effort over the next three years will likely be concentrated on reducing spending, with exceptions for education, health and defense. There will, however, be tax increases on big business to try and win support — or defuse opposition — on the moderate left.
Among these increases, the most significant is likely to be an 8.5 percent surtax on the profits of companies with turnover in excess of €1 billion, which is expected to hit 300 companies and raise €8 billion for the state. Barnier also announced, without much detail, some form of new tax on the “very wealthiest families.” A new tax on transactions where large companies buy back their own shares is probable as well. And the existing sales tax on heavily polluting cars is expected to increase too.
Not all of this is new. For example, both of the expected “technical” measures were already planned by the outgoing Macron-controlled government. However, the surtax on big business — reversing a headline from the early Macron years — was not.
Unsurprisingly, Barnier’s decision to abandon the Macron camp’s anti-tax-rise orthodoxy has already created a rift in his week-old coalition. An open letter warning against tax rises was published by 27 deputies from the president’s Renaissance party at the end of September. And the situation is further complicated by the likely need to present an amended budget in order to impose up to €20 billion in emergency spending cuts for this year.
What’s more, on the surface, there’s no majority in the splintered assembly to agree on a budget of any kind.
The four-party left-wing New Popular Alliance, with 193 seats, plans scores of amendments, pushing for tax increases on businesses, the wealthy and the moderately wealthy. The left also wants higher government spending on education, health and welfare; and to ignore financial markets and flout the EU’s deficit and debt limits.
For its part, the far right, with 142 seats, wants increased spending on security and welfare but no increases in taxes. It says the budget deficit can be cut by spending less on immigrants and withholding part of France’s payments to the EU.
And in the face of all this, Barnier’s own center coalition, with 166 seats, and the center right, with 47 seats, remain weak and divided.
In theory, Barnier needs 289 votes to pass a budget, and 289 abstentions to avoid a successful censure motion. But even if he can keep his own coalition intact, he currently has at most 213 seats in the assembly — or 230, if centrist independents and deputies from overseas departments are included. Meaning, we can expect the upcoming budget debates and votes to provide a series of trip-wire censure motions.
Barnier has essentially inherited the hardest job of any recent French government. Despite his appeal to the overriding national interest, he faces a steep uphill struggle in enacting a 2025 budget. And if he is to successfully steer France through these challenging fiscal waters, he’ll need to pull out all his skills as a successful negotiator.