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France unveiled a new budget plan aimed at reducing the deficit and complying with EU regulations. The draft budget includes significant tax hikes and spending cuts totaling 60 billion euros ($65.6 billion). The focus on tax increases surprised analysts, as the package also includes politically sensitive proposals such as pension adjustments, cuts to local government, and additional taxes on large corporations. The goal is to decrease the projected 6.1% deficit in 2024 to 5% of GDP by next year, with a target of reaching the EU’s 3% deficit limit by 2029.

The government’s fragile position and the need to find 60 billion euros in savings have made the budget process challenging. There is a debate over the proposed measures, including tax increases on households with high incomes and corporations, as well as cuts to government spending. The government’s ability to meet its deficit target is uncertain, given the reliance on tax hikes.

Concerns have been raised about the budget’s impact on economic growth and the possibility of credit downgrades on France’s sovereign debt. The budget’s effect on growth is expected to shift from a boost in 2024 to a drag in 2025 and 2026. While the government has tried to minimize the impact on growth, analysts warn that the large fiscal consolidation could hinder economic performance.

In the near term, ratings agencies are likely to wait and see how the budget measures are implemented before making any changes. Moody’s could potentially move to a negative outlook this year, with a downgrade possible next year. Overall, there are concerns that sharp spending cuts could impede economic growth and result in a rating downgrade for France.

Overall, France’s budget plan faces challenges in reducing the deficit, balancing tax increases and spending cuts, and avoiding negative effects on economic growth and credit ratings in the coming years.

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