(Bloomberg) -- Prime Minister Michel Barnier delayed a target date to bring the budget deficit within the European Union limit by two years in an admission of the dire state of France’s finances.
France will now aim to bring the gap within 3% of economic output by 2029 instead of 2027, the new premier said Tuesday in his first address to lawmakers to set out his policy priorities. His plan includes spending cuts and tax hikes for the wealthy and large companies.
Repairing France’s public finances is a core challenge for Barnier, whose premiership is tenuous given his centrist coalition doesn’t have the numbers to ward off a concerted opposition attempt to topple the government. Investors have been dumping French assets in recent months, with the risk premium on the country’s debt approaching its highest level since the euro-area crisis.
“The real sword of Damocles is our colossal financial debt,” said Barnier, who was appointed by President Emmanuel Macron Sept. 5. “If we are not careful it will put our country on the edge of a precipice.”
Barnier said the deficit is set to expand beyond 6% this year and the situation would worsen further without action. As a first step, he said his government would aim to reduce the deficit to 5% of economic output next year with two-thirds of the effort coming from spending cuts and the rest from tax increases on wealthy individuals and big companies with “significant profits.”
Barnier did appear to receive some political breathing room when the leader of the far-right National Rally, Marine Le Pen, indicated she wouldn’t immediately support a no-confidence motion the left is expected to propose in the coming days. If the National Rally were to join such a motion, the measure could easily gain the numbers to pass, which would dissolve the government.
Responding to Barnier at the National Assembly, Le Pen said her party would refrain from bringing down the government and urged the administration to transform the prime minister’s stated intentions into action. She also thanked Barnier for his “courtesy” in respecting her party like others.
The nationalist group “doesn’t plan to drag the country into chaos,” Le Pen said. “The National Rally has made a responsible choice of refusing to censure your government from the outset to give it a chance – as infinitesimal as it may be – to finally implement the necessary measures for repair.”
The government already warned last week that the deficit this year would be much wider than the 4.4% the previous administration initially planned, as tax receipts have disappointed and local authorities have ramped up spending. The slippage has rattled investors, who already started selling French assets when Macron dissolved parliament in early June.
French bonds yields remained substantially lower on the day amid a broad market rally, despite trimming gains slightly after Barnier spoke. The 10-year yield spread over Germany — a gauge of French bond risk — tightened one basis point to 78 basis points, compared to a peak of 82 basis points in recent days.
Before addressing the National Assembly on Tuesday, Barnier already signaled he would increase taxes, a move that fueled tensions among lawmakers backing his government who are reluctant to U-turn on Macron’s mantra of boosting business and the economy by not raising taxes.
Barnier’s support in parliament was already narrow, based on an awkward alliance between Macron’s centrist bloc and lawmakers from his own conservative Republicans party who hold fewer than 50 out of 577 seats.
He said higher taxes would be time-limited and targeted so as not to undermine France’s economic competitiveness.
“Confronted with our immense challenges we don’t have the choice: Our responsibility is to lessen the burden and get back room to maneuver with the budget,” Barnier said.
Barnier’s predecessor, Gabriel Attal, said Macron’s lawmakers are prepared to consider approving some measures, such as taxing share buybacks. But he cautioned that even if tax increases are limited to large companies that could weaken still weaken them and their suppliers and increase unemployment.
“For us, the best method is less spending and certainly not more tax,” Attal said. “Be careful that social injustice doesn’t emerge from so-called tax justice.”
In choosing spending cuts, he said the government will be mindful of the most vulnerable who rely on health education and social cohesion spending. Savings would also come from tackling inefficiencies and fraud on tax and social security.
To maintain tacit support from the National Rally, Barnier is also under pressure to take a tougher line on immigration. He has already promised “concrete measures,” but taking a hardline approach risks alienating more left-leaning lawmakers among Macron’s centrists.
On Tuesday, Barnier said his government would re-establish checks on France’s borders, in a policy move that mimics recent actions by the German government that imposed temporary checks on its nine land frontiers in an effort to tackle irregular migration and people smuggling.
“France will continue – for as long as necessary – to re-establish controls at its own borders, as allowed by European rules,” he said.
--With assistance from Alice Gledhill and James Hirai.
(Updates with reaction from Le Pen, details on budget plans)
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