(Bloomberg) -- The French government unveiled a budget for next year that aims to deliver a €60.6 billion ($66.2 billion) remedy for its creaking public finances and rebuild investor confidence even as it risks eviction by a hostile parliament.
Spending cuts will account for just over two thirds of what Finance Minister Antoine Armand called an unheard-of fiscal effort, with the rest coming from higher taxes on businesses, the wealthy and energy.
“Our country is in an unprecedented situation and at a pivotal moment,” he told reporters during a presentation of the delayed draft bill on Thursday. “The French economy is holding up, but our public debt is colossal. It would be both cynical and fatal not to see it, say it and recognize it.”
The 2025 budget is a crucial part of Prime Minister Michel Barnier’s efforts to restore political and fiscal order after months of volatility and uncertainty sparked by President Emmanuel Macron’s decision to dissolve the National Assembly and call snap elections.
Under the plans, temporary levies on some 440 profitable companies with annual revenue of more than €1 billion would generate €8 billion next year and €4 billion in 2026. An exceptional tax on maritime transport companies would contribute €500 million and €300 million in those same years.
The government will also propose increased taxes on plane tickets and a tax on private-jet usage. Company stock buybacks would also be subject to an exceptional tax when the shares are canceled.
As for individuals, around 65,000 households would face higher taxes aimed at bringing in €2 billion next year. The budget would place a floor of 20% on the rate for individuals earning €250,000 annually, or couples that get double that amount. The measure is meant to counter the effects of tax shelters they might otherwise benefit from.
The budget is based on a forecast for 1.1% growth in gross domestic product next year, a figure Armand said takes into account the negative impact from the measures.
Still, France’s HCFP high council that reviews finance bills said the macroeconomic assumptions are “fragile” because the extent of consolidation implies pressures on economic expansion.
Investor confidence has taken a hit as the political upheaval of a hung parliament coincided with a sharp deterioration in the budget deficit, principally because tax receipts wilted. A selloff in French bonds has driven the premium the country pays on 10-year debt compared with Germany to nearly 80 basis points from below 50 before the vote.
The government aims to narrow the deficit to 5% of economic output in 2025 from a forecast of 6.1% for this year, and has warned that it would balloon to 7% without taking action. It has already pushed back a goal to respect the European Union limit of 3% by two years until 2029. By comparison, Italy expects to be below that level in 2026.
“I don’t think markets consider this deficit reduction a particularly great achievement,” Hauke Siemssen, a rates strategist at Commerzbank AG, said before the budget was released.
Europe’s second-largest economy will also soon face the verdict of the world’s three biggest credit rating firms. Fitch Ratings, which downgraded France last year, may issue a new assessment later on Friday, followed by Moody’s Ratings on Oct. 25 and S&P Global Ratings a month later.
Even with a narrower deficit, France will have to sell a record €300 billion in bonds to finance itself next year. The cost of servicing the country’s debt mountain is expected to swell to €54.9 billion, according to the Finance Ministry.
While the minority government made up mostly of Macron’s centrists and Barnier’s conservatives must convince investors its budget plans are credible to avoid costs spiraling further, it also needs to reckon with lawmakers who can evict it from office.
A no-confidence vote triggered by the leftist New Popular Front alliance failed earlier this week, but the prime minister and his team would be toppled if Marine Le Pen’s far-right National Rally were to back another attempt.
The government’s budget plan will start to be examined in parliament next week. Lawmakers can introduce amendments and the bill needs to be adopted by the end of the year. Without a majority, the government will almost certainly need to use article 49.3 of the constitution to bypass a vote on the bill, increasing the likelihood of censure motions.
The challenge for Barnier is not so much to get outright support, but to find a balance of measures that are acceptable enough for Le Pen to refrain from allying with the left to bring down the government.
Pension ‘Theft’
Even before Thursday’s presentation, Le Pen had criticized some of the proposals, saying that a plan to reduce outlays by delaying the indexation of pensions until July 1 would amount to “theft.”
Still, Barnier has kept the measure, which the draft budget foresees delivering €3.6 billion out of €14.8 billion of social-security savings. The government also plans to reduce the number of civil servants by some 2,200 posts.
Barnier risks opposition from within the ranks of the lawmakers backing his government. Some centrists have said they would not favor tax increases that risk undoing years of Macron’s pro-business policies they say are crucial to supporting jobs and growth.
One of the president’s signature policies to spur investment was to cut the corporate tax rate to 25% from 33.3%. The temporary measures in the budget bill would see that rise next year to the equivalent of 30% for companies with more than €1 billion of annual revenue and 36% for those with over €3 billion of revenue. The rates would drop to 28% and 30% respectively the following year.
Companies have already voiced concerns about the impact of the budget on the economy. According to France’s largest business lobby, Medef, hundreds of thousands of jobs could be at risk if the government goes ahead with a plan to pare back tax breaks on low-income jobs. The measure is expected to save €4 billion.
“We’re asking companies for real efforts, but my mission as economy minister is to ensure these efforts have the most limited impact on employment,” Armand told Le Figaro newspaper in an interview.
Patrick Pouyanne, the chief executive officer of oil major TotalEnergies SA, said the balance between spending cuts and taxes on the wealthiest businesses and individuals “seems acceptable,” adding that France’s fourth-biggest company by market value wouldn’t object to a planned tax on share buybacks if it remains at 1%.
“There needs to be a response to the sense of growing inequalities,” he told Les Echos newspaper in an interview. Still, “all these extra taxes must necessarily be accompanied by higher cuts in public spending.”
--With assistance from Francois de Beaupuy and Valentine Baldassari.
(Updates with timing of ratings agency reviews in 13th paragraph, finance minister comment in 24th paragraph, TotalEnergies CEO comment in last two paragraphs.)
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