French government presents 2025 belt-tightening budget

By Leigh Thomas and Michel Rose

PARIS (Reuters) -France's government delivered its 2025 budget on Thursday with plans for 60 billion euros ($65.68 billion) worth of spending cuts and tax hikes on the wealthy and big companies to tackle a spiralling fiscal deficit.

Prime Minister Michel Barnier's new government is under increasing pressure from financial markets and France's European Union partners to take action after tax revenues fell far short of expectations this year and spending exceeded them.

But the budget squeeze, equivalent to two points of national output, has to be carefully calibrated to placate opposition parties, who could not only veto the budget bill but also band together and topple the government with a no-confidence motion.

"The primary aim of this budget is to reduce our deficit and contain our debt," Finance Minister Antoine Armand told journalists. "This reduction has to start now, it's necessary to protect France's financial credibility and more broadly ensure our economic stability."

Lacking a majority by a sizeable margin, Barnier and his allies in President Emmanuel Macron's camp will have little choice but to accept numerous concessions to get the budget bill passed, which is unlikely before mid to late December.

The far-right National Rally, whose tacit support Barnier needs to survive any no-confidence motion, has already helped derail a government proposal to postpone a pension increase by six months to save 4 billion euros.

Members of Macron's party are also reluctant to see the president's legacy of tax-cutting go up in smoke, and have threatened to reject tax increases.

Barnier has said he will spare the middle class and instead target big companies with a temporary surtax to raise 8 billion euros and individuals earning over a quarter of a million euros per year for another 2 billion euros.

All taxpayers will nonetheless be hit by plans to restore a levy on electricity consumption to where it was before an emergency reduction during the 2022-2023 energy price crisis.

GROWING RISKS

The government has previously said the budget bill will reduce the public deficit to 5% of gross domestic product (GDP) next year from 6.1% this year - higher than almost all other European countries - as a first step towards bringing the shortfall into line with an EU limit of 3% in 2029.

The national fiscal watchdog, mandated by law to make sure the budget bill stacks up, said the 2025 deficit target looked "fragile" and was based on optimistic economic assumptions.

Already swollen to 3.2 trillion euros, France's national debt burden is set to reach nearly 115% of GDP next year and interest payments will be the biggest single budgetary expense in the coming years, exceeding even big-spending departments such as defence and education.

While tax hikes will make up one third of the 60 billion euro budget squeeze, the rest will come from spending cuts, with 20 billion cutting across France's ministries, sparing only the defence, interior and justice ministries.

But spending on welfare, health, pensions and local governments will all take targeted hits, which lawmakers may be tempted to reverse in parliament.

France's borrowing costs surged after Macron called a snap parliamentary election and his centrist party then lost to a left-wing alliance. Financial markets' shifting perception of French risk has seen the premium on the country's bonds surpass that on their Spanish equivalent.

Investors are likely to pay close attention to whether the budget can get through parliament without being watered down too much, although ultimately Barnier may have to resort to using special constitutional powers to bypass lawmakers.

Rating agency Fitch is due to review its assessment of France on Friday, though markets see a bigger risk of a downgrade when Moody's updates it stance on Oct. 25.

The budget will also face scrutiny from the European Commission, which has subjected France to an excessive deficit procedure for falling foul of the EU's fiscal rules.

($1 = 0.9136 euros)

The following are the main measures:

SPENDING CUTS

The French government will cut 2,200 jobs. The headcount for teachers, in particular, will drop, along with the expected drop in the number of pupils, government officials said.

France will cut its foreign aid budget by 1.3 billion euros.

Subsidies for apprentices and other jobs will be cut by 2.1 billion euros.

Green subsidies, in particular those for insulation and the purchase of electric cars, will be cut by 1.9 billion euros.

The planned increase of pensions due to inflation on Jan. 1 will be postponed by six months, saving 3.6 billion euros.

TAX HIKES

Big companies

France's largest companies with revenue exceeding 1 billion euros will pay an additional tax on their profits. The tax is expected to raise 8 billion euros and, if approved, would affect 440 companies.

Wealthy individuals

Individuals earning more than 250,000 euros a year will see a temporary increase in income tax, and a minimum tax of 20% will be introduced for those households only, to prevent the use of tax loopholes, raising 2 billion euros per year.

Air transport

France will raise a tax on airplane tickets and private jets.

The amount, currently being discussed with the industry, will be added in an amendment to the budget bill during parliamentary debates.

France currently has a tax of 2.6 euros per flight, lower than in Britain or Germany, government officials said.

Utilities

Power utility EDF, which was nationalised previously, will increase its dividend to the French state by 2 billion euros.

A tax on electricity, which had been cut to almost zero during the energy crisis of the past two years, will be raised back to "slightly more" than what it was before the war in Ukraine, bringing 3 billion euros, government officials said.

The tax increase will nonetheless result in a drop of around 9% of power bills for consumers, when taking into account the fall in wholesale power prices, the officials said.