France faces challenges in meeting its public deficit target of 5% of GDP, with potential budget carryovers leading to savings but also increased tax burdens and frozen state funding affecting local services. Political uncertainty may hinder economic growth, while financial markets react negatively to instability, driving up bond yields. The European Central Bank’s rate cuts offer some relief, but persistent issues could lead to heightened financial strain if improvements are not achieved.
Strategies to Prevent Civil Servant Payment Disruptions
In France, the government has various mechanisms, such as special laws or ordinances, designed to prevent situations that might hinder the timely payment of civil servants. However, regardless of whether a new Prime Minister manages to pass a diluted budget or the 2025 financial plan mirrors that of 2024, experts like Maxime Darmet from Allianz forecast that the nation will struggle to achieve its target of reducing the public deficit to 5% of GDP by next year.
A carryover of the 2024 budget, which would effectively freeze state spending, could lead to savings between 15 and 18 billion euros, as noted by Mathieu Plane, an economist at OFCE. This figure is almost on par with the initial projections for the 2025 budget. However, while social spending—automatically adjusted for inflation—would rise, the government would need to abandon planned tax increases of at least 20 billion euros, which included proposals like a surtax on high incomes and corporate profits.
Impact of Potential Economic Scenarios
According to estimates from Natixis bank, in such a scenario, France’s deficit might hit 5.3% of GDP, putting the country under scrutiny from Brussels for its excessive public deficit. If a technical budget is implemented, retirees would see their pensions adjusted for inflation starting January 1, even though the government initially intended to fully adjust only those pensions below the minimum wage, leading to delays.
Prime Minister Michel Barnier raised concerns about the possibility of increased income tax burdens, indicating that nearly 18 million citizens could face higher taxes, while others might be subject to income tax for the first time due to the failure to incorporate planned re-indexation of tax brackets into the finance law.
Despite these challenges, experts like Eric Dor from IESEG School of Management believe that a budget for 2025, passed later in the year, will need to include certain provisions that have become customary in such circumstances. Local authorities may suffer from frozen state funding, which could jeopardize the efficiency of public services, potentially leading to higher local taxes, particularly in property tax, as a means to offset losses.
Furthermore, the reduction in spending could negatively influence growth, as highlighted by Charles-Henri Colombier from Rexecode, who warned that a budget carried over from 2024 would reverse the public investment gains that have previously supported growth in France. Increased tax pressure on household incomes would likely stifle consumer spending, further exacerbating economic stagnation.
Political uncertainty may also exacerbate these challenges, with OFCE estimating that it could detract 0.2 percentage points from GDP in 2025. This uncertainty often prompts households and businesses to adopt a cautious approach to spending, which could deter foreign investment and reduce tax revenue, complicating the fiscal landscape further.
Financial Market Ramifications
Patrick Martin, president of Medef, cautioned that the repercussions of governmental instability could undermine the trust of creditors and neighboring countries. Financial markets, already sensitive to uncertainty, have begun to react adversely. Following Prime Minister Barnier’s commitment to governmental accountability, yields on French ten-year public bonds surged from 2.86% to 2.92% within hours.
The “spread,” which measures the difference in bond yields between France and Germany—a key indicator of investor confidence—also widened significantly. Barnier pointed out that such political instability would have a direct impact on interest rates, resulting in substantial costs for servicing debt owed to various international investors.
Nevertheless, France has a significant ally in the European Central Bank, which has pursued a policy of rate reductions since June, aided by declining inflation within the eurozone. This has alleviated some pressure on state bond interest rates. However, as Aurélien Buffault, a bond manager at Delubac AM, warns, if conditions do not improve in the near future, market fatigue could set in, leading to rapid escalations in financial strain.