France: Higher-than-expected 2023 Deficit Tests Fiscal Targets

Even so, social discontent may hinder swift progress given the scale of recent protests against pension reform. Capital investment required for the energy transition and enhancing military infrastructure, alongside direct support for Ukraine (whose foreign debt is rated by Scope at CC/Negative), also make reallocation of spending more likely than permanent cuts.

Thirdly, reducing the budget deficit and stabilising debt may require continuing, if not intensifying, consolidation efforts shortly before the next general elections scheduled for 2027. However, as elections approach, political commitments to cost cutting may fade, leaving part of the necessary reforms and consolidation efforts for an incoming administration.

Constraints On Tax Policy, Uncertain Economic Outlook Weigh On Budgetary Prospects

Current geopolitical tensions and a reform agenda frustrated by the government’s lack of a majority in parliament raise uncertainties over the economic growth outlook and the strategy of consolidating the budget centered on more dynamic economic activity. The government has ruled out tax increases, while planning a middle-class household tax cut possibly in the 2025 budget.

Rebuilding fiscal buffers between external shocks remains a longstanding credit challenge, with public debt increases during crises significantly exceeding post-crisis consolidation. This implies a structurally rising debt trajectory, underlined by the steady increase in debt-to-GDP since 2002 from 60%.

Higher-than-expected public deficits drive the Negative Outlook assigned by Scope Ratings to France in May 2023. Scope’s next scheduled rating publication date for France is 3 May.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Brian Marly, Analyst at Scope Ratings, contributed to drafting this article.