EuropeWar in Ukraine

France’s belt-tightening budget aimed at reining in debt

France’s belt-tightening budget is meant to regain control over its “colossal” debt burden, Finance Minister Antoine Armand said on Friday,adding that the government was keeping a close eye on the views of financial markets.

The government delivered on Thursday its 2025 budget with plans for 60 billion euros ($65.5 billion) worth of spending cuts and tax hikes on the wealthy and big companies to tackle a soaring fiscal deficit.

“Our policy is not made for rating agencies but we obviously look at the international climate and at how France is viewed,” Armand told France 2 TV.

Main spending cuts and tax increases in 2025 budget

SPENDING CUTS

The French government will cut 2,200 jobs. The headcount for teachers, in particular, will drop, along with the expected drop in the number of pupils

France will cut its foreign aid budget by 1.3 billion euros.

Subsidies for apprentices and other jobs will be cut by 2.1 billion euros.

Green subsidies, in particular those for insulation and the purchase of electric cars, will be cut by 1.9 billion euros.

The planned increase of pensions due to inflation on Jan. 1 will be postponed by six months, saving 3.6 billion euros.

TAX HIKES

Big companies

France’s largest companies with revenue exceeding 1 billion euros will pay an additional tax on their profits. The tax is expected to raise 8 billion euros and, if approved, would affect 440 companies.

Wealthy individuals

Individuals earning more than 250,000 euros a year will see a temporary increase in income tax, and a minimum tax of 20% will be introduced for those households only, to prevent the use of tax loopholes, raising 2 billion euros per year.

Air transport

France will raise a tax on airplane tickets and private jets.

The amount, currently being discussed with the industry, will be added in an amendment to the budget bill during parliamentary debates.

France currently has a tax of 2.6 euros per flight, lower than in Britain or Germany, government officials said.

Utilities

Power utility EDF, which was nationalised previously, will increase its dividend to the French state by 2 billion euros.

A tax on electricity, which had been cut to almost zero during the energy crisis of the past two years, will be raised back to “slightly more” than what it was before the war in Ukraine, bringing 3 billion euros, government officials said.

The tax increase will nonetheless result in a drop of around 9% of power bills for consumers, when taking into account the fall in wholesale power prices, the officials said.

“Facing a spiralling deficit, we must act and that is exactly why we presented yesterday a recovery budget. We absolutely need to regain control over our debt and our deficits.”

Ratings agency Fitch is scheduled to update its view on France’s debt late on Friday, although markets see a bigger risk of a downgrade from Moody’s when it reviews its position at the end of the month.

Prime Minister Michel Barnier’s new government is under increasing pressure from financial markets and France’s European Union partners to take action after tax revenues fell far short of expectations this year and spending exceeded them.

“The magnitude of the proposed consolidation and the corresponding reliance on tax increases leave us less confident in the ability of the government to meet its 2025 deficit target of 5.0%,” Goldman Sachs analysts said in a research note.

France’s borrowing costs surged after President Emmanuel Macron called a snap parliamentary election and his centrist party then lost to a left-wing alliance. Financial markets’ shifting perception of French risk has seen the premium on the country’s bonds surpass that of their Spanish equivalent.

But the budget squeeze, equivalent to two points of national output, has to be carefully calibrated to placate opposition parties, who could not only veto the budget bill but also band together and topple the government with a no-confidence motion.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *