France Maintains Large 2024 Deficit Target in Slow Fiscal Consolidation Plan

France’s proposed budget for 2024 still targets a gradual reduction of the fiscal deficit, but aims to achieve this through limited spending cuts with the proposal based on optimistic macroeconomic assumptions, Fitch Ratings says. The budget proposal is consistent with our view that progress with fiscal consolidation remains limited. Slow consolidation and a high level of public debt were key drivers of our downgrade of France’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA-’/Stable from ‘AA’/Negative in April 2023.

The French government presented its 2024 draft budgetary proposal on 27 September, outlining a reduction in the fiscal deficit from 4.9% of GDP in 2023 to 4.4% in 2024. The government aims to bring the fiscal deficit below 3% by 2027. These targets are unchanged from the Stability Programme that was presented in April. Deficit reduction is to be achieved through a combination of savings measures and continued strong tax revenue growth.

However, the savings outlined in the budget proposal are accompanied by new spending measures, the indexation of social benefits and a rising interest bill. Announced savings are primarily driven by the gradual phasing-out of energy subsidies, worth EUR15 billion (0.5% of GDP) and post-pandemic stimulus measures. Meanwhile, the draft budget includes an additional EUR7 billion (0.2% of GDP) to help fund the green transition and EUR25 billion (0.9% of GDP) for the indexation of pensions and social benefits as well as personal income tax brackets. As previously announced, defence spending will be raised by EUR3.3 billion (0.1% of GDP) each year in 2024 and 2025.

The 2024 draft budget maintains the government’s relatively optimistic assumptions on growth and employment for 2024, projecting real GDP growth to reach 1.4% (above the government’s and our potential growth forecasts of 1.35% and 1.2%, respectively). In our latest Global Economic Outlook published in September, we cut our 2024 growth forecast for France to 1.1% from 1.3% as monetary tightening and weaker growth among main trading partners weigh on the economy. Fitch also forecasts lower real GDP growth for 2023 at 0.8%, compared to the government’s forecast of 1.0%.

We forecast that the government will meet its deficit forecast of 4.9% of GDP for 2023 but believe that the deficit will come down more slowly than the government projects, reaching 4.6% of GDP in 2024, based on our lower growth forecast for next year. France’s level of government debt is the second highest of the ‘AA’ category sovereigns and we project it to gradually increase to 112% of GDP by end-2025, more than double the forecast ‘AA’ category median of 43.6%.

In Fitch’s view, the budgetary process itself points to the political challenges to policy implementation that the Macron government has faced since losing its parliamentary majority in the July 2022 elections. As a result, the government has used Article 49.3 of the constitution, which allows it to enact some legislation without a parliamentary vote, for the first stages of approving the 2024 budget and new multi-year public financing programming bill. It has already used Article 49.3 to pass the 2023 budget and a controversial pension reform this year.
Source: Fitch Ratings