France ready to accelerate spending cuts as it battles persistent deficits

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France is prepared to intensify public spending cuts and needs to pursue further structural reforms as it seeks to return to “sound public finances”, the country’s finance minister has said, as rising bond yields pile pressure on governments to bear down their deficits.

Bruno Le Maire said he would try to wring out an extra €1bn in spending cuts on top of the €16bn announced last month in the country’s budget as it heads to parliament for review. This was “clear evidence” that Paris stood “ready to go further”, including by re-examining France’s generous welfare state.

“If there is any possibility to go quicker in the reduction of public expenses and the reduction of public debt I will do it — I am totally aware of the risks linked to over-indebtedness,” Le Maire said in an interview in Marrakech at the IMF’s and World Bank’s annual meetings.

“I also want to think about the French model: what is it in the French model that does not work? What is it which is too expensive and not efficient enough,” he added. “We need to address those questions.”

Le Maire’s signalling comes as the government faces pressure from public finance and audit watchdogs and Brussels to defend its deficit-cutting plan, which is slower than many other EU countries.

France will also soon begin another round of talks with credit rating agencies to defend its approach, including with S&P Global Ratings, which put it on negative outlook ahead of a review in December. Fitch has already downgraded France’s rating.

France’s proposed budget for 2024 will lead to a deficit of 4.4 per cent of national output — well above the EU’s 3 per cent target — even though the EU is preparing to re-impose its debt and deficit rules after they were suspended during the pandemic. The government expects the deficit to fall below that level by 2027, making it one of the last EU countries to comply.

The heavy borrowing comes amid a more febrile mood in global bond markets, as interest rates increase and investors question how quickly inflation will start dropping in the wake of central banks’ rate-rising campaigns.

Investor worries in the euro area have focused on Italy, which was hit by a flurry of selling in bond markets last month after Prime Minister Giorgia Meloni’s government raised its fiscal deficit targets and cut growth forecasts for this year and next. 

The IMF last week urged countries around the world to suppress their borrowing given high interest bills and sluggish growth, warning during meetings in Marrakech that global public debt ratios were heading towards 100 per cent of GDP by the end of the decade.

Le Maire declined to compare his budgetary situation with that of other countries such as Italy. But he said the difference between France’s government bond yields and those of Germany — the EU’s key benchmark — had remained “quite stable”.

“There is no gap between our words and our decisions,” Le Maire said. “I really think that our debt trajectory and deficit trajectory are credible ones.”

He added that the experience of 2009 and 2010 and the financial crisis showed it would be a mistake to go too fast in curbing public debts and spending. Back then, he said, countries ended up with both “more indebtedness and less growth — that is exactly what we want to avoid”.

But he said that during a time when interest rates were not far from 4 per cent it was important to be aware of the risks of excess public debt and “create awareness” of the issue with the public.

By the government’s own estimates the cost of servicing the debt will rise to around €75bn annually in 2027, which would be the single biggest expense in the budget and more than is spent on education or defence.

Critics point out that Le Maire’s effort to systematically review public spending this year fell short of expectations, with most of the €16bn in savings coming from the phasing out of subsidies to shield households and businesses from the energy crisis.

Pierre Moscovici, who heads France’s Court of Audit, has said the hardest is yet to come because France will have to find €12bn in savings annually. “We must go much, much further,” he told L’Opinion newspaper in September.

Le Maire said cutting public spending would not be enough, predicting further structural reforms, for example to the country’s labour market rules, so as to push unemployment down further from around 7 per cent.

While France has shortened unemployment compensation from 24 months to 18 months in some cases and tweaked other aspects of the unemployment insurance programme, Le Maire said there was a “legitimate question” as to whether the country should go further as it seeks to induce people to go back to work.

The government also pushed through a controversial increase to the retirement age this year, which aims to encourage older people to work longer, a necessity given France’s ageing society. 

“The social welfare state as it stands is not sustainable anymore,” Le Maire said. “When I say we will stand firm on the path of reforms, I think I have some credibility.”