France’s finance minister Bruno Le Maire has promised a renewed push to cut public spending on everything from energy subsidies to real estate tax credits as the government seeks to rebuild its credibility with credit rating agencies.
France narrowly avoided a downgrade from S&P Global Ratings earlier this month and remains on a negative outlook with the next review set for December. Fitch already downgraded the eurozone’s second-largest economy in April.
“The decision by S&P is an incentive to do more and to do better,” said Le Maire in an interview. “We need to stick to our debt reduction program and to cut public expenditures.”
The reprieve from the rating agency was a boost for Emmanuel Macron’s government as it emerged from a bruising fight over raising the retirement age and after losing its parliamentary majority needed to enact reforms.
Le Maire, who is Macron’s longest serving minister, said France was now taking a more stringent approach ahead of a conference on public finances in Paris on June 19 where he expected “to announce quite a high level of reduction of public expenditures”.
France has maintained persistently high debt levels and budget deficits since 2020, as the government spent heavily to support businesses and households through the Covid-19 pandemic and energy crisis.
In April, it accelerated plans to bring public deficits back under the target set by the EU of 3 per cent of national output by the end of 2027. The deficit target is around 5 per cent this year, with some economists warning it will be challenging to hit it if growth slows or a recession hits.
Rising interest rates mean that the annual cost of servicing France’s debt will increase from €50bn last year to €70bn by 2027, according to official forecasts. By then, the servicing costs will amount to more than annual spending on defence and only slightly less than on education.
Despite this backdrop, Le Maire said the government would not severely cut public spending, preferring to stick with its strategy of enacting business-friendly reforms.
“Austerity is not an option . . . This would be an economic and political mistake,” he said. “We need more growth, more productivity. How? By implementing difficult reforms, such as the pension reforms, and phasing out the protections we put into place during Covid-19 and energy crisis, so as to further cut public expenditures.”
France will end subsidies for natural gas this summer, and the so-called electricity price shield that has protected consumers from price rises will be phased out by the end of 2025. That could lead to between €25bn and €40bn in savings.
Other areas being targeted are a popular buy-to-let tax credit known as the Pinel law that costs about €2bn a year, and programmes that subsidise the wages of young workers in apprenticeships and other professional training.
“As France nears full employment, it can also reduce the level of support to the labour market,” said Le Maire. The country’s unemployment rate was 7 per cent in April, according to Eurostat, the EU’s statistics office.
In its decision on June 2, S&P said it was keeping France on a negative outlook because of the “downside risks to our forecast for France’s public finances amid its already elevated general government debt”, adding that it could lower its rating in the next 18 months if certain metrics were not met. “We believe there are risks to the execution of official budgetary targets.”
The focus on French public finances also comes as European Union member states are haggling over a new version of the bloc’s fiscal rules, known as the Stability and Growth Pact, reigniting old disputes over how member states’ budgets should be managed.
Germany has taken a particularly hardline position on the Brussels’ proposed reforms that would, for the first time, enable debt-reduction agreements to be reached directly between the European Commission and national governments. Berlin would prefer firmer rules with specific annual targets for cuts based on debt-to-GDP ratios. While more heavily indebted countries would have to make steeper cuts, even less indebted countries would not be exempt.
France disagrees with Germany’s stance that less indebted countries must comply with specific rules on annual spending cuts.
German finance minister Christian Lindner told the FT recently that he saw “no landing zone” to agree on a deal that many in Brussels hope to reach by year end.
But Le Maire was more optimistic. “By the end of the year it should be possible,” he said. “A large majority of countries have already found consensus.”
Given the need for European countries to spend on everything from green technologies, artificial intelligence, education and defence, now was not the time to be overly prescriptive, he argued.
“If we want to be part of the race of the 21st century between China and the US, this is time to invest more,” he said.
Additional reporting by Martin Arnold in Frankfurt and Sam Fleming in Brussels
Source: Economy - ft.com
