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French plans to fix ‘worrying’ finances lack credibility, auditor says
(Bloomberg) — France’s state auditor said existing plans to repair “worrying” public finances lack credibility, sounding the alarm over the budget as political groups with expansive tax and spending policies compete to form a new government after early elections.
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President Emmanuel Macron’s government promised further spending cuts and revenue-raising measures in April to revive failed plans to reduce the budget deficit to 3% of economic output by 2027.
State auditor Cour des Comptes said on Monday, however, that the updated program was based on “particularly optimistic” growth forecasts, unprecedented spending cuts and imprecise measures to boost tax revenue. The government also appears to have failed to take into account the depressive impact of such a tightening, he said.
“This trajectory does not seem very credible or very realistic,” the Cour des Comptes said. “French public finances are therefore in a worrying situation.”
The review is another red flag for the euro zone’s second-largest economy, whose next government will need to find more than 15 billion euros ($16.4 billion) in extra revenue or savings a year to meet European Union demands, according to people familiar with the assessment. Under the new fiscal rules, Paris must present a medium-term plan by mid-September.
“It is clear that there is a need for fiscal adjustment in France and other countries with high debt,” EU economics chief Paolo Gentiloni told reporters ahead of a meeting of euro zone finance ministers in Brussels.
France’s budget is already shrouded in uncertainty after a turbulent election that resulted in a hung parliament. At one point during the campaign, a sell-off in French bonds pushed the premium on the country’s borrowing costs compared with Germany to the highest since the region’s sovereign debt crisis more than a decade ago.
While market tensions have since eased as no party has secured the absolute majority needed to have free rein over the budget, a left-wing coalition called the New Popular Front, which promises a big increase in public spending, is on the rise after winning the most seats.
Asked about the possibility of a new wasteful administration in Paris, German Finance Minister Christian Lindner warned that all EU member states must respect the bloc’s fiscal rules.
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“It is in our common interest to maintain the sustainability of our public debt, and I think any future French government will have to follow these rules as well,” he told reporters in Brussels.
The New Popular Front would need to water down its proposals to form any kind of government capable of commanding a majority in France. Current finance chief Bruno Le Maire has opened the door to building consensus on specific projects but has limited the scope for compromise by warning that the left’s manifesto is a danger to France and that Macron’s plans for fiscal consolidation must not be watered down.
Pierre Moscovici, a former French finance minister who now heads the Court of Auditors, said there were different possible paths to reducing debt and deficits, but that neither the left nor the right could escape the imperative for action.
“We have fallen behind in the euro zone, which is not good,” he told a news conference. “France is the third most indebted country, which is not the podium I dreamed of coming into the Olympics.”
In a written response to the auditor’s report, Le Maire and Budget Minister Thomas Cazenave said the Finance Ministry shared many of their observations. But they said the government had made unprecedented efforts to fix the budget this year and that the high debt and deficit levels in 2023 were the result of choices to protect economic growth and address inflation.
Speaking to reporters on Monday, Le Maire said he disputed several elements, including the auditor’s forecasts for growth and tax revenues. He also said Macron’s tax-cutting policy had boosted the economy and hurt public finances less than the auditor estimated.
The outgoing finance minister said the current government was preparing options for his successor for the 2025 budget, which would ensure France met its long-term deficit reduction commitments.
“The task of repairing public finances has begun with a firm hand, and there must be no further deviation from that line,” Le Maire said. “It will be up to the next government to make decisions — my recommendation is not to deviate from the line chosen by this government.”
Even before the election, France was in investors’ crosshairs after S&P Global Ratings downgraded the country. In the run-up to the vote, the European Union also instigated a lawsuit against Paris that was designed to impose greater discipline on member states with excessive debt.
The Cour des Comptes said France was increasingly diverging from other European countries in its efforts to close the deficit after the Covid pandemic and energy crisis. Higher debt costs constrain all other spending and investment, and leave France “dangerously exposed” if there is another economic shock, it said.
“It is crucial, as envisaged in the current stability programme, to return the deficit to below 3% of economic output and to put debt on a downward path” in line with EU rules, the auditor said. “But this effort must be made on the basis of more realistic and more reliable forecasts than is the case today.”
–With assistance from James Hirai, Marilen Martin and Sonja Wind.
(Updates with comments from EU commissioner in sixth paragraph, German finance minister starting in ninth paragraph.)
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