PARIS (Reuters) – Once appointed, French Prime Minister Michel Barnier’s new finance minister must lose no time coming up with a 2025 budget that could make or break the incoming government.
Whoever Barnier picks will have to figure out how to plug a gaping hole in the public finances, hand over a draft budget by Oct. 1 and then steer it through a deeply divided parliament.
Any missteps could irk opposition parties, who could topple the government if they gang up together and vote through a no-confidence motion.
Following are five questions that the new finance minister will need to answer quickly:
RAISE TAXES OR CUT SPENDING?
Weaker-than-expected tax revenues and higher spending by local governments has left France’s public sector budget deficit spiralling towards 6.2% of economic output next year if nothing is done to rein it in.
The new government will therefore have to decide how to balance tax hikes and spending cuts so as not to anger parties on either the left or the extreme right.
As a conservative, Barnier is likely to prefer spending cuts though relying only on belt-tightening could jeopardise growth in the euro zone’s second-biggest economy.
Barnier has said that France needs more “tax justice”, suggesting targeted hikes are possible even if that has been a taboo under President Macron’s previous governments.
WHERE COULD SPENDING AXE FALL?
Outgoing finance minister Bruno Le Maire has warned that France will need 30 billion euros in savings this year and next to keep its deficit reduction targets in reach, though that is increasingly looking unlikely.
A recent finance ministry spending audit identified possible savings worth more than 12 billion euros on subsidies and tax breaks for companies, medical equipment, long-term illness care, public sector absenteeism as well as training programmes and apprenticeships.
More savings could be found with measures such as not raising pensions or civil servants wages in line with inflation, though that would outrage opposition parties.
WHICH TAXES COULD BE RAISED?
If tax hikes are in the 2025 budget, Barnier’s finance minister could take up a proposal from Le Maire to increase special levies on energy companies and corporate share buybacks.
More tax income could also be found by reducing tax breaks on short-term rentals on platforms like AirBnB as well as corporate research and development spending.
SHOULD FRANCE KEEP ITS DEFICIT-REDUCTION TARGETS?
Ultimately, there may be no combination of spending cuts and tax hikes that can placate opposition parties as the budget bill goes through parliament.
That would leave the finance minister with few choices other than to renege on the outgoing government’s sacrosanct objective to lower the budget deficit in line with an EU ceiling of 3% of GDP by 2027.
If the European Commission and France’s EU partners were to grant more time for this adjustment, Paris could make smaller spending cuts and tax hikes, which would be less of a burden on the economy.
HOW SHOULD FRANCE DEAL WITH ITS EU PARTNERS?
If France is given more time to bring its deficit down, the new finance minister would need to negotiate new targets with Brussels and win backing from other euro zone countries, not least Berlin.
However, France’s euro zone partners may be unwilling to grant Paris more time unless Barnier’s government commits to pro-growth economic reforms.
Even that might not be enough in light of France’s poor record respecting EU deficit rules and the risk that opposition parties could bring down Barnier’s government.
(Reporting by Leigh Thomas; Editing by Christina Fincher)
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