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Explainer-What early elections mean for France’s public finances
PARIS (Reuters) – President Emmanuel Macron’s surprise decision to call early parliamentary elections casts doubt on France’s already challenging deficit reduction plans by putting the spendthrift far right within reach of power.
Stunned by the right-wing National Rally’s (RN) massive gains in the EU parliamentary elections, Macron called the election for Sunday.
WHAT IS THE SITUATION OF PUBLIC FINANCES?
The government was already under increasing pressure from ratings agencies, the national watchdog and the International Monetary Fund to detail €20 billion in budget cuts planned for this year and again next year.
The budget tightening – now unlikely to go ahead – was considered necessary to reduce the public sector deficit from 5.5% of economic output last year to below the EU limit of 3% by 2027.
The government had little choice but to control spending this year after the deficit exceeded its 2023 target by a wide margin due largely to an unexpected drop in tax revenue.
The misfire led Standard & Poor’s to cut its rating on France’s sovereign debt last month, the second of the big three agencies to lower its view in just over a year.
WHAT THE FAR RIGHT RULE MEANS FOR FINANCE
Although the parties have not yet put together their platforms for the early elections, the RN plan will probably be extremely expensive for public finances, judging by the proposals for the last parliamentary elections in 2022.
He then proposed reducing the retirement age from 64 to 60, which Macron raised last year from 62 after weeks of protests, severely depleting his political capital.
The RN also wants to renationalize toll road operators, exempt workers under 30 from paying income tax and eliminate inheritance tax for the poor and middle classes.
They would also reduce value-added tax on petrol, heating fuel, electricity and gas from 20% to 5.5%, while increasing healthcare spending by €20 billion.
The think tank Institut Montaigne estimated that, in total, the cost could reach 100 billion euros, or more than 3.5% of gross domestic product.
If a left-wing coalition emerges triumphant from the elections, spending could also increase and will probably only be partially offset by tax increases on the wealthy and corporations.
Even if Macron’s group manages to form a new governing coalition, the government will face enormous pressure to ease ongoing spending cuts.
WHAT ARE THE CONSEQUENCES FOR FRANCE’S PARTNERS IN THE EU?
With little prospect of meeting its current deficit targets no matter who wins, France could soon be on a collision course with its EU partners when it comes to its public finances.
EU governments agreed in December to reform their fiscal rules, allowing more time to reduce public debt from record post-COVID levels while creating incentives for investment.
But even under the revised rules, France is already struggling to meet its spending and debt reduction obligations, facing the prospect of infringement proceedings and potentially a fine of 0.05% of GDP every six months for non-compliance.
(Reporting by Leigh Thomas; Editing by Angus MacSwan)