France's 2026 budget measures unlikely to be passed as proposed: Fitch

Persistent political fragmentation, the risk of social unrest and weak economic growth means bringing down France’s sizeable deficit will remain challenging, it noted in a release.

On July 15, Prime Minister Francois Bayrou announced sizeable savings measures worth €43.8 billion for 2026 (1.4 per cent of gross domestic product [GDP]). This is higher than the €40 billion savings effort his government had initially planned, primarily to offset a €3.5-billion increase in defence spending next year (0.1 per cent of GDP).

Close to two-thirds of the measures directly affect expenditure, aiming to address France’s exceptionally high expenditure-to-GDP ratio.

A proposed ‘blank year’ would see a broad freeze on spending at its 2025 level across ministries (with exceptions for defence), and on pensions and other social benefits. There were also proposals to slim down the public-sector workforce, fight tax fraud, introduce an unspecified tax contribution from wealthier households, tighten access to unemployment benefits and abolish two national holidays to increase annual working days and boost tax revenue.

Though the sizeable measures outlined could be fairly effective in reducing some of France’s short-term fiscal pressures, there is a high risk that they will get watered down as the government tries to find a consensus in support of consolidation during parliamentary debates in the autumn, Fitch Ratings observed.

Opposition parties across the political spectrum have criticised Bayrou’s plans, with some threatening to call another vote of no confidence in the government.

“We believe the government will try to seek support from leftist opposition parties, as it did to get the 2025 budget approved this year. But parliamentary support for the 2026 proposal remains highly uncertain after last month’s failure to renegotiate pension reform. The Socialist Party had endorsed the 2025 budget on the condition of revisiting pension reform, and talks with social partners over labour market reforms are continuing,” the rating agency said.

Medium-term fiscal challenges are set to persist given the temporary nature of some of the proposed measures, including the one-off spending freeze, it noted.

The proposed suspension of inflation indexation for income tax brackets and social benefits is likely to have a less pronounced impact given that inflation has significantly fallen this year.

Rising pressure to increase spending towards the newly agreed 3.5 per cent of GDP as well as weak growth and rising interest costs compounds fiscal challenges, it noted.

France’s fiscal deficit reached 5.8 per cent of GDP in 2024 and Fitch Ratings expects it to fall slightly to 5.5 per cent this year, broadly in line with government’s target and the reported fiscal deficit of 5.6 per cent in the first quarter this year.

“However, we currently do not believe that the government will meet its goal to bring the deficit to 4.6 per cent of GDP next year and to 2.8 per cent by 2029. In the absence of a credible medium-term fiscal consolidation strategy, we forecast that deficits will remain sizeable at 5.5 per cent in 2026-2027,” Fitch Ratings added.

ALCHEMPro News Desk (DS)