Note: Based on Loi de Programmation des Finances Publiques for France; latest available Stability Programme for Germany and Belgium; and figures published by the Office of Management and Budget (OMB) for the US. Figures published by the Office for Budgetary Responsibility (OBR) for the UK show the change between fiscal years 2023/24 and 2026/27. 2026 is the most forward-looking projection year among selected sovereign peers of France. Sources: National Ministries of Finance, OMB, OBR, Scope Ratings.
Structural Pressures, Uncertain Fiscal Measures Test the Robustness of Deleveraging
Investment needs, considerable compared with planned expenditure savings, and spending rigidities will hinder the reduction of France’s primary deficits.
The 2024 draft budget includes a rise in spending of EUR 7.0bn for the green transition, EUR 5.6bn for education, and EUR 3.3bn for defence. Such expenditure is likely to grow further in the coming years whereas the government is yet to detail where efficiency gains will materialise.
Debt-funded Covid- and energy-crisis related support also have a long-term impact on public finances when borrowing costs are near their highest level since 2011. The government expects the interest burden to increase by 0.7pp over 2022-27 to 2.6% of GDP (EUR 74.4bn).
As the government has so far ruled out domestic tax hikes, revenues are primarily contingent on real GDP growth, which the government revised down to 1.4% for 2024 from 1.6% previously. This is still above our 1.0% growth projection for next year.
Political Obstacles Remain in the Way of Deeper Economic Reform
Structural reforms, including those on pension and unemployment benefit systems, support France’s GDP growth outlook. However, their positive impact will likely take more time to materialise due to the Covid pandemic and the cost-of-living crisis.
The introduction of more growth-enhancing supply side reforms also appears unlikely in the current socio-political context. Reform momentum could even fade further, partly related to the electoral cycle. The minority government of President Emmanuel Macron is preparing for European elections due next June, municipal elections in 2026 and presidential and parliamentary elections in 2027.
With an uncertain and evolving reform agenda going forward, the expectation that real GDP growth will run above potential between 2025 and 2027 – estimated at 1.35% by the government but only 0.8% by the European Commission – appears optimistic.
This is consistent with a weakening in public finances and implementation risks to the reform agenda that underpinned the Negative Outlook Scope Ratings assigned to France’s AA long-term ratings in May.
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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Brian Marly, Analyst at Scope Ratings, contributed to writing this commentary.