France Looks at the Budget: Barnier Plans Billions in Savings and Tax Increases

France's Prime Minister Michel Barnier announces savings and tax increases totaling approximately 60 billion euros for the coming year, aiming to reduce the rising budget deficit and bolster investor confidence. These measures are intended to reduce the budget deficit from its current 6.1% of gross domestic product (GDP) to 5%, according to government officials who, in accordance with internal regulations, spoke anonymously. A significant portion of the savings will be achieved through spending cuts in ministries, local authorities, and the social security system. About 20 billion euros are expected to be generated from temporary tax increases on wealthy individuals and large companies, as well as higher environmental taxes. Following the announcement, the yield spread that investors demand for French government bonds compared to safer German bonds fell by one basis point to 78 basis points. However, the value remains close to its highest level in over a decade. Finding the right mix of measures for the next budget is a delicate task for Barnier. His tenure is on the line, as his centrist coalition does not have enough votes to protect the government from a concerted ousting attempt by the opposition. Additionally, investors who sold off French assets in recent months due to concerns about deficit reduction targets and political stability post-elections are exerting pressure. Some deputies who support Barnier’s minority government have already warned that they will not back tax increases that could jeopardize seven years of pro-business policies under Emmanuel Macron. Barnier’s goal is to design the tax increases to affect only the largest companies and the wealthiest individuals. Moreover, environmental taxes are expected to be increased by around 1.5 billion euros, with potential measures including penalties for high-emission vehicles and levies on the most harmful modes of transport. The complete budget proposal will be presented to the cabinet on October 10. The initial deficit target is set at 5.2% of GDP. Some measures, including green taxation and 5 billion euros of planned state spending cuts, are expected to be introduced through amendments during parliamentary debates. Additional cost-cutting steps include delaying pension adjustments until July 1 and capping the increase in health expenditures at 2.8%, after an initial rate of 3.2% had been set for 2014. Overall, about half of the 40 billion euros in savings are to be achieved by limiting the budgets of state ministries. The remainder will come from the slowing of local authorities' spending and savings in the social security system.