France Unveils Tough Austerity Budget to Mend Its Finances

 

France Unveils Tough Austerity Budget to Mend Its Finances

 

The French government is seeking deep spending cuts and higher taxes in an effort to tame its ballooning debt and deficit.

 

Liz Alderman

By Liz Alderman

Reporting from Paris

https://www.nytimes.com/2024/10/10/business/france-budget-debt-deficit-macron.html

Oct. 10, 2024

 

The French government on Thursday sought to head off a rapidly growing financial crunch, unveiling plans to plug one of the worst deficit and debt burdens in Europe with an austerity program involving deep spending cuts and hefty one-off taxes that would fall mostly on the rich and big corporations.

 

“Our deficit is considerable,” Prime Minister Michel Barnier said Thursday, hours before appearing at the French Parliament with a new budget aimed at saving 60 billion euros next year — one of the biggest single rounds of belt-tightening in France’s recent history. “Everyone is going to have to play their part.”

 

Mr. Barnier needs to find a whopping €110 billion in savings over the next several years to rein in French finances and bring them back in line with European Union budget rules. The debt and the deficit are ballooning rapidly after President Emmanuel Macron spent more than €100 billion in the last several years to shield households and businesses from an energy crisis.

 

Today, France is in worse fiscal straits than Spain, Italy and Greece, with the deficit surging this month to 6.1 percent of economic output, from 5.5 percent last year. The debt has exploded to more than €3.2 trillion, or more than 110 percent of the country’s gross domestic product. Interest payments on the debt alone cost more than €50 billion this year and will rise to €80 billion by 2027 if nothing is done. By contrast, France’s entire defense budget is €47 billion.

 

“The country is in an unprecedented situation,” Antoine Armand, France’s new economy minister, said at a news media briefing. “The economy is resilient, but our public debt is colossal. To not recognize this would be cynical and fatal.”

 

Mr. Barnier is aiming for major cuts in 2025 to stop the bleeding. He has insisted the burden will fall on those who can most afford it. But opposition parties warned that the new budget would impose harsh austerity on the French.

 

“This will affect people’s daily lives,” said Aurélie Trouvé, a member of the leftist France Unbowed party. “It’s the people who come to collect your trash, the workers in your cafeteria, primary schools — all will be affected by the collapse in spending.”

 

The budget would raise €20 billion through one-off taxes on high earners, starting with childless couples making €500,000 or more a year. The measure will hit about 65,000 taxpayers out of 20 million households paying income tax.

 

More than 400 companies would collectively be tapped for at least €8 billion in additional tax revenue. And the biggest corporations, including oil companies like Total, will be asked to pay one-off taxes on so-called mega profits above €1 billion.

 

An environmental tax on new cars that exceed certain emissions thresholds will be increased sevenfold. And the government will also target airline travelers, raising ticket costs especially on long-distance flights with a so-called solidarity tax aimed at pulling in at least €1 billion in revenue. The plan drew an immediate outcry from Air France, the country’s flagship airline, and the International Air Transport Association, which warned that the tax would be a “disaster” for France. “You cannot tax your way to prosperity,” it said in a statement.

 

The biggest savings will come from substantial government spending cuts. Around 57 percent of France’s economic output goes to government spending, more than any other country in Europe. Much is lavished on administration and social programs including pensions, the generous unemployment system, hiring and health care.

 

The proposed budget would find €40 billion worth of savings with cuts to some social benefits, including delaying until next summer an inflation-indexed increase in pension payments and reducing social security reimbursements for doctor appointments. At least €1 billion in subsidies for consumer purchases of pharmaceutical products will be cut. And a €16 billion program to encourage businesses to hire blue-collar entry-level workers will be slashed.

 

Government agencies and local governments will also face large spending reductions, with a requirement that every €1 of spending must be offset with €2 of savings. Officials said thousands of government workers would probably be laid off.

 

“The deficit has been degraded by excessive spending, so it’s by lowering spending that we’ll fix this,” Laurent Saint-Martin, the new budget minister, said at a news media briefing.

 

Military spending, however, will remain untouched: Mr. Macron sharply raised France’s defense budget after Russia’s invasion of Ukraine in 2022, in line with pledges made by other European members of NATO, to ratchet up spending on security. The defense budget will instead increase in 2025 to €50.5 billion.

 

The budget drew criticism from all sides. Gabriel Attal, the former prime minister and the leader of the centrist group in the National Assembly, said the tax increases on companies were a departure from the pro-business policies that Mr. Macron had pushed during his seven-year presidency. The plan “has too many taxes,” said Mr. Attal, who presented a counterproposal to Mr. Barnier’s that would instead cut government spending more heavily.

 

But French finance officials say the tax increases are a drop in the bucket compared with the €100 billion the government spent in recent years to help keep French businesses afloat during the energy crisis. “We’re far from asking them for an effort of the same order of magnitude as that which was provided by the state,” Mr. Armand, the economy minister, said.

 

France’s main fiscal oversight body warned Thursday that the budget could hurt the French economy, cutting growth next year from an already tepid 1.1 percent pace forecast by the government.

 

Even so, France’s central bank governor, François Villeroy de Galhau, said the country urgently needed to regain control of its public accounts. “We’re like a family that’s been living beyond its means,” he said.

 

Liz Alderman is the chief European business correspondent, writing about economic, social and policy developments around Europe. More about Liz Alderman