France’s Macron Seeks Credibility With Budget Balancing Act

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(Bloomberg) — The French government will present a budget on Monday that aims to renew Emmanuel Macron’s fiscal credibility despite extra spending to cushion energy price shocks and the challenge of emboldened opposition in parliament. 

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After vast outlays during the Covid pandemic, the president has built an economic plan for his second five-year term rooted in containing the deficit below 5% of economic output next year and below the European Union’s 3% ceiling by 2027.

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Balancing tax and spend is fast becoming tough, however, as the economic outlook deteriorates and the cost of capping electricity and natural gas prices soars. The government has already earmarked another 16 billion euros ($15.6 billion) in the 2023 budget to prevent bills from rising more than 15%.

The budget will sacrifice some of Macron’s pro-business plans by delaying tax cuts to preserve government revenues and keep the deficit goal in sight. Speaking last week ahead of the formal presentation of the fiscal plans to cabinet, Jean-Rene Cazeneuve, a senior member of the National Assembly’s finance committee, said the target “is a red line we must not cross.”

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In addition to financial challenges, there are heightened political risks surrounding the 2023 budget after Macron lost his absolute majority in parliament in June elections. Unless the government gets the backing of some opposition lawmakers, Prime Minister Elisabeth Borne would likely need to use an article in the constitution, called 49.3, that allows bills to pass without votes. The price would be to expose her government to the risk of being toppled in a confidence vote.

In an interview with French newspaper JDD on Sunday, Budget Minister Gabriel Attal said opposition parties are unlikely to back the budget as a matter of principle, leaving little doubt about the parliamentary outcome.

“The oppositions have themselves said that 49.3 is probable,” Attal said. “Whatever happen, France can’t do without a budget.”

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Other key points from budget minister interview:

Divisions could widen further if the government includes an amendment to raise the retirement age in the social security chapter of the budget instead of negotiating a reform with unions and opposition parties. Ministers said last week that Macron may yet choose that path.

There are also economic risks as the equilibrium of the budget assumes growth of 1% next year, a base case that is increasingly uncertain. Economists expect only 0.5%, which is also the Bank of France’s “reference scenario.” If the economy is weaker than the government expects, the budget would need to be revised with more rigor to achieve the deficit target.