Government budget delays pose serious challenges for France’s economy, with economists warning that failure to finalize the 2025 budget could lead to increased public deficit and hinder growth. The potential extension of the 2024 budget may limit state spending, affecting social services and household taxes. Rising uncertainty could stifle consumer spending, while financial markets already show signs of concern. Without timely improvements, France risks damaging its credibility with creditors and facing further financial instability.
The Impact of Government Budget Delays on France’s Economy
The current climate of weakened growth, slow budgetary reforms, and rising uncertainty poses significant challenges for France. Economists predict that the government’s potential failure to establish a budget for 2025 could have detrimental consequences for the nation, though it may not lead to the drastic “storm” the government fears.
Challenges in Managing the Deficit
France has various options to avert a complete standstill that could hinder civil servant salaries, whether through a special law or other means. However, regardless of whether a new Prime Minister opts for a “watered-down budget” with concessions or simply extends the 2024 budget, the country is likely to fall short of its objective to lower the public deficit to 5% of GDP next year, according to Allianz economist Maxime Darmet.
If the 2024 budget is extended without changes, it would lead to state spending being capped, resulting in savings of approximately 15 to 18 billion euros, as stated by Mathieu Plane from OFCE. This figure is close to the savings initially outlined in the 2025 finance bill.
Despite these savings, social spending—which is automatically adjusted for inflation—would rise, while the government may have to abandon tax hikes worth around 20 billion euros that were previously under consideration. Natixis bank warns that in this scenario, the deficit could swell to 5.3% of GDP, causing concern as Paris is already under scrutiny from Brussels for its high public deficit.
Retirees would see their pensions adjusted for inflation at the beginning of the year, contrasting with the government’s original plan to limit this adjustment for pensions below the minimum wage. Additionally, the income tax burden would increase, affecting 380,000 more households due to a non-inflation-adjusted tax scale, leading to higher payments for 17 million households, as Budget Minister Laurent Saint-Martin recently indicated.
Local governments may also suffer, with potential freezes on state funding jeopardizing essential public services. Maxime Darmet notes that some local authorities might raise property taxes to offset their financial losses.
Growth Concerns Amid Financial Turmoil
The anticipated decline in spending is expected to negatively impact growth, with the extent of the effect varying by scenario. Charles-Henri Colombier, director of economic outlook at Rexecode, explains that maintaining the 2024 budget, particularly regarding expenditures, could reverse the positive growth that has been driven by public investment in an economy heavily reliant on it.
Increasing tax burdens on households are likely to stifle consumer spending, further exacerbated by heightened political uncertainty—currently projected to reduce GDP by 0.2 percentage points in 2025. This uncertainty may lead both households and businesses to adopt a wait-and-see approach, while foreign investors’ confidence may also wane. The result is decreased growth, which translates to lower tax revenues, complicating the budget situation.
Financial Market Reactions and Future Risks
Patrick Martin, president of Medef, the principal employers’ organization, cautions that the repercussions of budget delays could erode trust with creditors and neighboring nations. Financial markets, wary of uncertainty, have already begun to react, as evidenced by a spike in the yield on French ten-year bonds from 2.86% to 2.92% following government developments.
The “spread,” which measures the difference between France’s and Germany’s interest rates—often viewed as a reflection of investor confidence—also increased sharply, reaching 0.88 points. Fortunately for France, the European Central Bank has initiated a rate-cutting strategy, aided by a drop in eurozone inflation, which has alleviated some pressure on state bond interest rates.
However, if the situation does not improve in the coming months, there is a risk that market fatigue could emerge, leading to rapid escalations in financial instability, warns Aurélien Buffault, bond manager at Delubac AM.