France’s spending turns into political liability for Emmanuel Macron

Reviving the French economy has been one of Emmanuel Macron’s main achievements. But that reputation has taken a hit as the French president struggles to control state spending and opposition parties start attacking him on the issue. 

Far-right leader Marine Le Pen has used news about the government overshooting its own deficit targets as a cudgel and the conservative Les Republicains (LR) have threatened a no-confidence motion that could bring down prime minister Gabriel Attal.

“The president’s answer to every problem has been to spend, spend, spend,” said Olivier Marleix, who heads the LR group in the assembly, citing as an example roughly €70bn in subsidies to consumers and businesses to blunt the energy crisis since 2021.

“The situation is now severe with politically painful decisions ahead on cutting public services that will be incomprehensible to the French.”

France’s deficit last year ended up at 5.5 per cent of GDP, worse than a 4.9 per cent forecast. While deficits are typical in a country that has not balanced its budget in decades, an unforeseen shortfall of €21bn in tax revenue left the eurozone’s second-largest economy on a degraded deficit and debt trajectory — with only Italy and Greece in a worse position. 

Moody’s said the French target to bring deficits below 3 per cent by 2027 was “unlikely”, and the finance ministry is now racing to prepare a new debt cutting plan to submit to Brussels this week.

The state of French finances risks also damaging Macron’s credibility with EU partners, especially Germany, just as he has begun pushing for new joint borrowing to strengthen the bloc’s defence industry and exhorting allies to do more for Ukraine. 

Credit rating reviews from Moody’s on April 26 and S&P on May 31 could result in downgrades. While previous French downgrades after the eurozone debt crisis did not significantly affect the economy or borrowing costs, the market has been jittery: the spread between French and German 10-year bonds has widened by around 7 basis points since mid-March. 

“France has twin problems of a negative trade balance and wide public deficits, but we usually benefit from favourable terms on borrowing thanks to its virtuous EU neighbours,” said Philippe Dessertine, an economist specialised in public finances at IAE Paris Sorbonne business school. “But now rising interest rates and slowing growth have shown the risks of this broken model, and everyone is panicking. But we should have panicked long ago!”

Macron’s reforming zeal, first as economy minister under President François Hollande and then in the Elysée palace, has focused on tax cuts and business-friendly moves to boost growth and attract foreign investment.

His measures helped push down unemployment to 7 per cent at the end of 2022 — the lowest in 30 years, although it ticked up to 7.5 per cent last year. France also avoided recession despite inflation pressure last year to grow GDP by 0.9 per cent versus 0.5 per cent for the eurozone.

But Macron has not broken with French bad habits on spending.

To respond to widening deficits, his veteran finance minister Bruno Le Maire in February decreed €10bn in emergency spending cuts across government. Officials are considering more cuts to social benefits and budgets for local governments, perhaps even this year, which risk being unpopular.

Budget minister Thomas Cazenave told the Financial Times that Macron would not suddenly change tack.

“Our challenge is to find savings and clean up public finances but without breaking what are the best allies for recovery, that is to say growth and job creation,” Cazenave said. “We do not want massive tax increases, which will hurt economic dynamism and damage purchasing power.”

Yet divisions have emerged within Macron’s own camp, with some calling for tax hikes to tackle the debt. Attal has not closed the door although he insists they should hit companies rather than individual taxpayers.

Left-wing parties have called for reviving a wealth tax that was earlier scaled back by Macron. “In a context of degraded public finances, we must call for a contribution from those who have the most,” said Valerie Rabault, a Socialist MP.

The government will not be able to avoid going before MPs if it is to make further cuts this year or raise taxes. Although it can override lawmakers to pass the budget without a vote by using the constitutional tactic known as the 49.3, this opens it up to a no-confidence motion.

Macron’s coalition lacks an outright majority in the National Assembly, making Attal’s government vulnerable to parliamentary setbacks. The LR’s most recent threat of a no-confidence vote has attracted the support of Le Pen’s Rassemblement National (RN) party, which has sought to present itself as serious about public finances in a departure from Le Pen’s usual big spending, populist stance.

If Attal loses a parliamentary confidence vote, Macron could either appoint a new cabinet or call for early elections, an unlikely scenario given that polls show his centrist alliance would lose seats.

Bercy, the finance ministry, is preparing a smaller 2025 budget that will include at least €20bn in cuts to compensate for forecasted lower growth. That is still less strict than the national auditor’s warnings the country would need €50bn in spending slashed next year to reach its deficit target of 3 per cent of GDP by 2027. 

Experts say there are few easy fixes and call for a deep review of the functioning of public services, such as police, healthcare and education.

Attal has promised another tightening of the unemployment system this year that may shorten benefits to 12 months from up to 24 months now. Unions reacted with outrage, while some of Macron’s left-leaning MPs have also questioned the fairness of such a move. 

“The president’s deep conviction is that the success of this term depends on our ability to boost growth and go further to reduce unemployment,” said Cazenave.