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France’s 2024 budget walks tightrope as excessive deficit procedure looms

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France’s 2024 budget treads a fine line, with green transition financing and the battle against inflation taking precedence over reducing public debt – though the high deficit raises fears the Commission may trigger an excessive deficit procedure.

“[France has] three challenges to face: the inflationary crisis, reducing debt and deficit levels, and ensuring fiscal leeway for investments in security, green transition and education,” Economy Minister Bruno Le Maire told journalists on Wednesday (27 September), as he unveiled the 2024 budget bill, due to start its legislative rounds in the fall.

Though the government had committed to “accelerating” public debt reduction, numbers show that the reduction of debt levels is likely to take more time, however.

An extra EUR7 billion, announced last week by Prime Minister Elisabeth Borne, is due to go towards the green transition. The government also agreed to continue to tie social and pension payouts to inflation, and up budgets of the home, justice and defence ministries. Interests on public debt are set to increase by another EUR10 billion.

As for the spending cuts, they are mostly the result of putting an end to the ‘energy shield’, first implemented in early 2022 after the start of Russia’s invasion of Ukraine to protect consumers from runaway energy prices.

Deficit and debt levels in the red

Bringing public debt and deficit levels down may be Le Maire’s “categorical imperative” – after years of employing a ‘whatever-it-takes’ budgetary approach to fight off the worst effects of both the pandemic and the inflationary crisis – but according to the budget as it stands, significant spending cuts will have to wait.

Instead, with public spending effectively still increasing in 2024, the government is gambling on strong economic growth forecasts to increase fiscal revenues. It estimates 2023 growth to top 1.4%, down from its previous 1.6% forecast – but significantly higher than the French Central Bank’s 0.9% expectations.

Deficit levels will remain at 4.9% of GDP in 2023, and fall to 4.4% in 2024, the government expects. Meanwhile, debt levels are due to stay put at 109.7% of GDP in 2024, according to forecasts by the French economy ministry, and will reach an expected 108.1% by 2027.

This budget is “undeniably the first step towards restoring public accounts”, Le Maire said.

The minister pointed to the success of structural reforms, especially that of the hotly-contested pensions reform, amounting to EUR12.5 billion worth in savings. He also confirmed the suppression of specific tax breaks in the real estate rental sector, and a new ‘transport infrastructure’ tax, which will bring in an expected EUR600 million in revenue for 2024 alone.

Eyes on reindustrialisation strategy

When it comes to spurring new investments, the government vowed to “remain true” to their intention to keep taxes low: so far, according to Le Maire, such “supply-side economics” have created 2 million jobs, opened 300 factories and “kept French growth positive while EU neighbours are entering recessions”.

In the long run, the government’s plan is to lower public deficits in the hope that its reindustrialisation strategy and business-friendly policies will start paying dividends as higher economic growth leads to higher fiscal revenues and lower unemployment.

The government is aiming to reach 5% unemployment – which it considers to be France’s full employment mark – by 2027.

Corporate tax rates were lowered from 33% to a flat 25% in Macron’s first term in office, and revenues should be up EUR11 billion in 2024, a ministerial source told Euractiv.

Other ‘production’ taxes – which apply to companies’ production processes and value-add – will be phased out between now and 2027.

Meanwhile, Macron’s promise a few months back to shrink household taxes by another EUR2 billion will have to wait for 2025, Le Maire announced. Other measures, such as the government’s plan to fight tax and ‘social’ fraud, are also due to come into effect in 2025.

Ultimately, in light of an uncertain global economy and continuous inflationary pressures, the government is treading a tight budgetary line.

“The government is stuck between different, clashing objectives: keeping public debt in check all the while mitigating the ongoing purchasing power crisis and investing in the green transition,” Sylvain Bersinger, chief economist at economic consultancy Aster?s, told Euractiv earlier this week.

Excessive deficit procedure

Notwithstanding the government’s combative narrative, a non-binding report published on Wednesday by the French public finance watchdog warned the government’s growth forecasts are overall “high”, citing a very volatile economic situation and ever-increasing interests on public debt. The 4.4% deficit figure for 2024 is also deemed “optimistic”.

Meanwhile, it alerted ministers against a possible triggering of an Excessive Deficit Procedure (EDP) come the Spring of 2024: the structural deficit – which effectively controls for inflation – would stand at a “very high” 3.7% of GDP by the end of next year, while public spending is increasing faster than what is recommended by EU fiscal rules.

The European Commission can trigger an EDP to push member states to reduce deficits deemed too large. When this happens, targeted countries must come up with reduction plans, and deadlines – otherwise, they risk being fined.

“The budget contains very few structural spending reduction measures,” the report reads, and a deficit higher than the 3% threshold as enshrined in EU treaties may leave France open to further scrutiny by the Commission.

Another budget bill, applicable to the 2023-2027 years, should also be adopted by the Parliament on Wednesday evening – through a non-vote procedure, known as ‘49.3’. According to the economy ministry, its approval is necessary to unlock EUR18 billion worth from the EU’s Recovery and Resilience Facility (RRF).

[Edited by Janos Allenbach-Ammann/Nathalie Weatherald]

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