French Premier Michel Barnier announces tax increases and spending cuts

Michel Barnier, France’s new Prime Minister, warned that the repair of the degraded country’s public finances would require years of “collective efforts” and announced “temporary targeted” tax increases on large businesses and the wealthy.

Barnier, in an address to the National Assembly on Tuesday outlining his agenda for government, said that our debts were “the sword of Damocles” above our heads. Barnier said that if we don’t act, the country is on the brink of a precipice. He added that interest costs will soon surpass spending on education and defense.

Barnier’s decision next week to propose a new budget that includes tax hikes represents a significant departure from the economic policies espoused in recent years by President Emmanuel Macron whose governments have lowered their taxes to promote growth and competition. This is a sign that the political landscape in France has changed dramatically since the snap elections held this summer, which led Macron to lose his control of the Assembly and form an awkward power sharing government with Barnier’s conservative Les Republicains.

Barnier has a tough job to do: clean up the public finances, at a time that opposition parties in an unresolved parliament have already threatened to topple Barnier’s government. Marine Le Pen’s Rassemblement National of the far right, which almost doubled its seat count in the snap elections, is now a key party, as its support would be required for a vote of no confidence to pass.

Barnier’s government will have difficulty passing structural reforms without a majority. Some parties want to reverse previous reforms such as Macron’s raising of the retirement age in 2017. Some centrists who are part of Macron’s coalition and support Barnier’s administration have criticized the U-turn regarding tax increases.

Barnier, as opposition legislators shouted above him, said: “Faced with our enormous challenges we have no choice. Our responsibility is to ease the debt burden and again find margins of maneuver on the budget.” France will delay its goal to reduce its public deficit to 3% of output until 2029, instead of 2027. This is a change that will require negotiations with Brussels. The EU’s second largest economy has already been placed in what it calls an excessive deficit procedure.

Mujtaba Raham, a consultant with the Eurasia Group, said Barnier was trying to use the fiscal crisis in his favor “by portraying the situation as extremely black” to try and force MPs into acting responsibly on the budget.

He said that Barnier was trying to establish himself as a new independent force in French politics, by blaming Macron’s successive governments for bringing France into a fiscal impasse since 2017.

Barnier didn’t specify amounts, but officials from the Finance Ministry had previously stated that spending cuts of €25bn to €30bn and tax increases would be required next year. Barnier did not specify the amounts, but he said that “one third” of the effort will come from new taxes and the rest from cuts to spending in areas like education and health.

Barnier stated that the first step to reducing debt was to reduce public spending. Barnier said that “reducing public spending means giving up the illusion of magic money, the temptation to subsidise all things and the illusion of free everything”.

France has exceeded its goals this year. The deficit is expected to reach about 6% of the gross domestic product. This is much higher than the goal of 5.1 percent and the level of 5.5% in 2023. Barnier set the goal that the deficit would reach 5 percent of GDP by 2025.

Investors worry about the government’s ability to plug its deficits. For the first time since decades, French borrowing costs have recently risen. S&P Globaldowngraded France’s rating in May. Three more ratings are expected.

Le Pen stated that the RN will not censure the Government immediately, but she set out “red-lines” which could influence its stance. She demanded that the government take action to address her priorities. These included funneling revenues from higher taxes on the wealthy towards low-income families and reducing immigration.

She said: “This spirit should not be taken as a blank check nor as an act of loyalty to a government we believe is more based on convenience than conviction.”