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French Government Tempers Budget Goal to Shelter Economy
(Bloomberg) -- France’s new Finance Minister Eric Lombard set out a slower pace of deficit reduction as he seeks to preserve economic growth and shore up political support after the previous government was toppled over its budget plan.
Lombard was appointed last month to piece together a 2025 finance bill that can significantly rein in the deficit from around 6.1% of economic output this year, while also garnering support in a divided National Assembly.
The previous government and its financial plans collapsed in December when lawmakers passed a no-confidence motion over measures to close the budget gap to 5% with around €60 billion ($62 billion) in tax increases and spending cuts.
“If we target 5%, it’s more than a 1% gap — which is considerable — and I think too much as we also need to support the economy,” Lombard said on France Inter radio. “So we are targeting a deficit that would be between 5% and 5.5%.”
Finding a fiscal path that is acceptable to parliament is a matter of survival for Lombard and the new prime minister Francois Bayrou. But the administration can’t give up on unpopular belt-tightening as the country’s struggles to control public finances in the last year have triggered sell-offs on it bonds and driven up borrowing costs compared with other European countries.
The ouster of Prime Minister Michel Barnier’s government early December exacerbated concerns and left France reliant on emergency legislation to keep the state functioning from Jan. 1.
The fiscal struggles also triggered a ratings downgrade from Moody’s last month which now considers there is only a very low probability that Bayrou’s government will durably reduce deficits.
While Lombard said he would have a softer approach to fiscal consolidation next year, he pledged to still meet the longer term objective of returning the deficit to within the European Union’s limit of 3% of economic output by 2029.
“We need to deal with the situation seriously to reverse the trend of our public finances so that the deficit reduces gradually,” Lombard said.
To meet the budget objectives, Lombard and Bayrou must navigate a National Assembly that ejected Barnier when Marine Le Pen’s far-right lawmakers supported a censure motion proposed by the leftist alliance.
The new finance minister, who is hosting talks with different political groups this week, said there is a “possible convergence” with more moderate members of the left including the Socialists. Among measures the left could agree on, Lombard cited ensuring that companies and individuals using tax optimization mechanisms pay their “fair share of tax.”
“I want to reach at least a non-censure agreement for our country to have a budget as soon as possible,” Lombard said.
He said the budget will contain around €50 billion ($51.6 billion) of tax increases and spending cuts, compared to €60 billion in Barnier’s plan.
Plans for exceptional levies of around €8 billion on the largest companies and €2 billion on the wealthiest households cannot be replicated exactly in the new budget. But Lombard said the new government is working on equivalent measures to raise the same revenues.
The finance ministry has not yet set a new growth forecast that will determine the parameters of the 2025 budget. Barnier based his plans on a 1.1% expansion this year, but uncertainty over the political and budget upheaval has clouded the outlook for investment and spending.
“Our belief is that when there is a budget that is not censured, it will reassure entrepreneurs and French people and have a positive effect on the outlook,” Lombard said.
(Adds comments on 3% EU deficit target and sovereign ratings from 7th paragraph)