The First Cut is the Deepest

The French government’s budget bill for 2025 pledges a discretionary effort of 1.4% of GDP. This is a serious amount, the largest effort over the Medium Term Fiscal and Structural Plan (MTFSP) for 2025-2028. Front-loading the measures, rather than pledging future virtue, is always preferable, especially when political conditions are fragile. When simply looking at how the ratios of spending and tax to GDP are forecasted in the government’s bill, a majority of the effort comes from higher tax. As we argued two weeks ago, given the fragile state of domestic demand, such choice is understandable in the short run. The issue – highlighted for instance by Fitch when they decided to put a “negative outlook” on their rating of France – is that many measures in the 2025 bill are temporary. Now that the government has delivered an “emergency budget”, it will need to sketch out a programme of more systemic measures, probably focusing on the spending side given the already high level of taxation.

In the short run, the market will probably focus on the political capacity of the government to get the budget passed. A “no vote” process via article 49.3 of the Constitution is likely, the real issue being then whether a motion of no confidence would succeed. Our baseline is that the budget will pass, but the government may have to consent to some watering down of its most unpopular aspects. We look at historical precedents to gauge the French MTFSP. The overall effort to get to a 3% deficit in 2029 would not be unprecedented – standing between the 1990s and 2010s past consolidation paths. In both cases though France benefited from a massive reduction in interest rates which we do not think can be replicated this time, and debt only marginally fell at the end of these adjustment phases.

We also take a look across the Atlantic. The higher-than-expected US CPI print for September provides another piece of evidence the Fed may have “jumped the gun” with its 50-bps cut in September, but we still expect 25-bps cuts in November and December.