January 2025: France still has no budget. But, at least, she still has a Prime Minister. After his general policy speech, he obtained a reprieve by escaping censorship. The Socialist Party did not vote for the motion tabled by France Insoumise, believing that François Bayrou's changes were going in the right direction, in particular the restarting of pension reform. The tenant of Matignon has obtained a respite, but the budgetary discussion is approaching. With its share of renunciations and novelties to contain an abysmal deficit. François Ecalle, former magistrate at the Court of Auditors, takes stock of the first avenues revealed by the Prime Minister.
PARIS MATCH. In his general policy speech, François Bayrou was vague on the 2025 budget. What we know is that the hoped-for savings will be less than those promised by Michel Barnier. How should this shift be translated?
FRANCIS ECALLE. It should first be noted that estimates of budgetary savings are often hypothetical and fragile. The High Council of Public Finances, which is responsible for issuing an opinion on the budgetary forecasts, estimated those announced by Michel Barnier for 2025 at only 12 billion euros and not at 30 billion. In any case, the savings shown by the current government seem less significant. It is in fact still very difficult in France to make savings on public spending. Political parties only want to do so on budget items whose amounts are relatively small. On really big expenses, there are a lot of “yellow lines.” To avoid the vote on a motion of censure, François Bayrou must therefore make more concessions than his predecessor on the scale of savings, hence this change.
In a column that I signed with Olivier Blanchard, former chief economist of the IMF, we estimated at 120 billion euros the effort necessary to just stabilize public debt at its current level as a percentage of gross domestic product (GDP). ), which is enormous even if we do it over several years. If we consider that it is necessary to increase military spending and the fight against climate change, the effort is even more like 150 billion euros in the form of savings on other expenses or an increase in compulsory contributions (taxes and social contributions). The estimate of 12 billion savings announced by Michel Barnier is consistent with our calculation, so they represented less than 10% of the necessary effort. The savings envisaged by François Bayrou are not yet precisely known but in fact it will be less.
What do you think of the first avenues for increasing taxes, particularly on businesses, financial transactions and the richest?
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This effort of 150 billion euros would need to involve a 4 to 5 point reduction in public spending as a percentage of GDP. It is economically possible and justified, other countries have done it and are not in a worse economic and social situation than ours, but it is unrealistic in the French political and social context. We must therefore resign ourselves to increasing compulsory contributions even if we are often on the podium of the OECD for their weight.
However, we must not increase levies on companies, even the largest, because their competitiveness is already insufficient, which results in a chronic deficit in our foreign trade and the deindustrialization of France. I am therefore reserved about measures that go in this direction such as the increase, even temporary, in the corporate tax rate. It is preferable to increase the taxation of individual shareholders of companies, for example the rate of the flat-rate withholding on the dividends they receive. We can more generally increase taxation on the richest households, but they are already heavily taxed in France and we cannot go much further in this direction. Let us remember that the fortunes of the richest households are shares in French companies which they really need. One day we will have to consider increasing high-yield taxes such as CSG or VAT which are effective if not fair.
Provisional tax increases tend to become lasting in France.
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Does this use of taxes reflect an “ease” on the part of the government when the major economies seem forgotten, or impossible given the political situation?
It is technically and politically easier to raise the corporate tax rate than to undertake a major reform of the State to reduce its expenditure. Given the very limited time for preparation of this new budget, as also that of Michel Barnier, we can therefore understand that the government is retaining tax measures of this type on a provisional basis, but the provisional tax increases have tendency to become sustainable in France.
What impact does this political instability and this baroque budget have on France's attractiveness?
Investors, French or foreign, do not like uncertainty and often freeze their projects when the horizon is unclear. This political instability and these budgetary and fiscal uncertainties can only have a negative effect on the attractiveness of France and, more generally, on economic activity.
Growth could therefore be very weak in 2025 and, as measures to restore public accounts will be limited, the public deficit will fall little and public debt will increase. For the moment, the State is borrowing quite easily because its creditors are not too worried, but this will not last forever. Certainly, we can think that the European Central Bank will always lend enough money to France to avoid a payment default, and financial market players are counting on it. But it cannot do so without requiring compensation like those that were imposed on the countries of southern Europe in 2011-2012: in practice austerity measures out of all proportion to what the French experienced until present (but these countries are doing much better today).
Ultimately, isn't the most important budget that of 2026 where the “real” savings and real choices will have to be made?
Unless there is further censorship, the government will in fact have more time to prepare the 2026 budget and to include real savings based on a serious evaluation of public spending, but I do not believe in it. I am convinced that he will seriously try to reduce public spending but he will not obtain the vote of Parliament and, above all, he will not have the support of the French if he proposes substantial savings. Many of our fellow citizens are worried about the situation of public finances, but there is no consensus among them on the measures necessary to redress our accounts. The public debt will therefore continue to increase until a crisis and an external constraint force us to carry out the necessary reforms painfully. No one knows when this will happen but it is to be expected.
