The fiscal equation gets tougher for France

Lower-than-expected tax revenues pushed France's budget deficit up to 5.5% of GDP in 2023, overshooting the government's 4.9% target. Given that European elections will take place in June, it decided to concentrate the bulk of the needed fiscal consolidation out to 2025 and beyond in a new fiscal plan submitted to Brussels on 17 April. We see increased downside risks to France’s sovereign rating from this political arbitrage, with the rating up for review by three major agencies in the coming weeks. 

Corrective measures will be taken in 2024, but the EUR10 bn in emergency budget cuts (just 0.2% of spending) will be insufficient to get the French budget deficit back on track. Indeed, in the stability programme submitted to Brussels, the government foresees the government deficit falling to 5.1% this year, 0.7 percentage points above the initial budgetary target. The deficit trajectory suggests the government is de facto abandoning for now its aim to reduce the public debt ratio, which could rebound to 112.3% of GDP in 2024 after three years of decline. 

But the stronger fiscal consolidation planned to start in 2025 risks curbing France’s economic growth, especially as France has announced its resolve to comply with EU fiscal rules by bringing the deficit down to 2.9% of GDP in 2027 and reducing public debt from 2026 on.

Such a large-scale budgetary effort was last undertaken during the euro area sovereign debt crisis of 2011-2013 and resulted in a recession in France. It remains to be seen whether the government really intends to risk sacrificing growth in an already tense political and social context. Nevertheless, recent developments confirm our view that governments’ fiscal stance is one of the main downside risks to our medium-term growth forecasts.

The budget slippage has resulted in a widening of the yield spread between French and German 10-year government bonds, reflecting concerns about France’s fiscal stability. In light of the risk to France's sovereign rating, we forecast that the spread on French 10-year bonds over their German equivalents could stand at 60 bps at year's end.