The French government needs to cut spending by 25 billion euros ($27.22 billion) this year to meet its promise to bring the deficit under control, it said on Monday.
Emmanuel Macron’s government, which lost its parliamentary majority in Sunday’s snap elections, is under intense scrutiny by the European Commission over deficit and debt levels.
Expected reduction
Finance Minister Bruno Le Maire said in newspaper statements that the expected cuts this year, worth $27.22 billion, are necessary for France to reduce its deficit to the government’s target of 5.1% of gross domestic product this year, revised from 4.4% earlier.
France’s deficit last year was 5.5% of GDP, worse than expected due to weak tax revenues.
France, like all eurozone countries, is expected to keep its deficit below 3% of GDP.
This condition, agreed among EU members as part of the Stability and Growth Pact, was suspended in 2020 to allow countries to deal with the Covid pandemic, and then with the economic fallout from the Russia-Ukraine war.
EU members have since agreed to get back on track to bring the deficit back on track over the coming years.
The European Commission warned France last month after it accumulated debts of more than 110% of GDP, almost double the EU’s allowed level.
In theory, the Commission could fine EU countries for excessive deficits, but this has never happened.
No force won outright in Sunday’s second round of elections, although a broad coalition of Socialists, Communists, Greens and the hard-left France Undégende party won the largest number of seats, taking 193 in the 577-seat National Assembly.
New government
The coalition, called the New Popular Front, has asked to be tasked with forming a new government, but Macron is pushing to exclude both the New Popular Front and the far-right National Rally from any broad government coalition.
The new Popular Front’s economic plans include reversing Macron’s pension reform and raising the legal minimum wage, which would further widen the budget deficit, according to several economists.
France’s creditworthiness has been affected by the prospect of such policies, with buyers of French government bonds demanding a risk premium of about 65 basis points on French debt compared to benchmark German debt.
This means that France now has to pay investors a higher return than a country like Portugal.
In early June, ratings agency Standard & Poor’s downgraded France’s sovereign debt rating to AA- from AA due to concerns about lower-than-expected growth.
Le Maire promised that the French deficit would fall below 3% by 2027.
