The new government led by François Bayrou faces immediate economic challenges, including a lack of a budget following the previous government’s censure. Starting January 1, France will operate under a “special law,” limiting tax increases and new initiatives. With rising national debt and projected unemployment, the government aims to establish a budget by mid-February. Concerns over economic instability persist, with forecasts indicating stagnant growth and potential worsening of the public deficit, raising fears of a “budgetary cliff.”
New Government Faces Economic Challenges
The newly formed government under François Bayrou is set to convene its first council of ministers on January 3, just eleven days after its establishment. However, the administration must swiftly address pressing issues related to the economy and budgetary constraints.
With the censure of the previous Barnier government leaving France without a budget, the country will fall under a “special law” starting January 1. This technical measure restricts the government to raise taxes and utilize the same budgetary allocations as in 2024, effectively sidelining any new initiatives that were part of the draft Finance Law (PLF).
This situation means that essential adjustments, such as indexing the income tax scale to inflation, are off the table. According to the Ministry of Economy, this could lead to an influx of “380,000 new households” into the tax system, further burdening existing taxpayers. Additionally, promised financial support for farmers and overseas territories grappling with various crises will remain unavailable.
In New Caledonia, the recent resignation of loyalist members from the independentist-led government has halted plans for a one billion euro loan aimed at recovery following the riots that erupted in mid-May, resulting in 13 fatalities.
Addressing Social Urgency and Economic Concerns
Following the power transition with Antoine Armand, the new Minister of Economy and Finance, Eric Lombard, prioritized “social urgency.” He emphasized his commitment to represent diverse viewpoints within the government while standing firm on his principles.
On BFMTV, François Bayrou expressed optimism for a budget to be established by mid-February, suggesting a reliance on the previous government’s PLF to expedite the process. Recent surveys by the National Institute of Statistics (Insee) have highlighted rising anxieties among households and business leaders since the government’s dissolution, noting a decline in consumer spending, investment, and hiring. The unemployment rate is projected to rise to 7.6% by June, with Insee describing a “gloomy landscape.”
Insee forecasts a stagnant growth rate of 0.2% for the first two quarters, making it challenging to achieve the anticipated 1.1% growth for 2025. Bayrou acknowledged the alarming “alert signal” raised last week by key employer organizations and unions regarding the economic and social instability caused by current uncertainties.
Among the significant challenges facing the new government are the soaring national debt, which reached 113.7% of GDP as of September, and a public deficit projected at 6.1% of GDP this year. Barnier had aimed to reduce this figure to 5% by the end of 2025, a target that Bayrou has now suggested may be slightly more flexible.
France is currently under scrutiny for an excessive deficit, with Brussels permitting a return to the 3% public deficit limit only by 2029, rather than the earlier target of 2027. Any further deviations from this path could result in sanctions and increased skepticism from the market, leading to higher borrowing costs.
In light of the potential for “political fragmentation,” Moody’s rating agency downgraded France’s sovereign rating on December 14, along with that of French banks. A subsequent censure of the government could plunge the nation into further uncertainty.
The French Observatory of Economic Conjunctures (OFCE) has warned that if the special law extends throughout 2025, the public deficit could worsen, reaching between 6.1% and 6.4% of GDP, raising concerns over a possible “budgetary cliff.”
Olivier Faure, the First Secretary of the PS, criticized the ambiguity of Bayrou’s statements and indicated that his group of deputies holds the power to prevent a censure motion against the government, yet sees no reason to abstain from censure at this time.
While acknowledging Eric Lombard’s background as a left-leaning figure and a personal acquaintance, Faure raised concerns on BFMTV regarding whether Lombard would have the autonomy to act among a “panoply” of conflicting personalities within the government.