Michel Barnier’s budget delivered a week ago, was largely as expected – focusing on politically clever measures such as a tax on high earning couples and windfall corporate tax, as well as economically savvy measures such as the delayed inflation indexation of pensions.
It was not quite enough to please the Fitch agency, who downgraded French debt to negative from stable (AA). Our sense though is that it is not too economically disruptive and should not – if passed – derail the economy.
There is still debate as to what the proportion of budget cuts/tax rises make up the budget package, and some of the budget proposals and the assumptions underlining them are not quite detailed enough and will be shaped as it goes through parliament
The budget now goes to the Assemblée’s Social Affairs committee and then to parliament itself late this month. At this stage there are rumours of adjustments such as taxes on ‘higher than average’ dividends and more expansive taxes on real estate disposals.
Passing the budget will be complex – the government is over 70 seats short of a majority. The constitution doesn’t provide for a parliamentary mechanism that is triggered by a budget ‘failure’, but it is possible for the budget to be passed if it is not opposed by a majority of MPs. A similar move might be a vote of confidence, but this is also unlikely to succeed (Rassemblement won’t vote for it).
To a large extent this budget is not the major hurdle, but continued austerity over the next three to four years will be difficult for the economy, and politically. For instance during the week, the top-end radio station France Culture featured a long interview with George Papakonstantinou, a former finance minister of Greece, who outlined the austerity that Greece had faced during its financial crisis. France is very far away from this level of budget cuts but the long term danger is that expectations are set to a very high level of public spending.
In that respect the risk is that while this budget passes, a political and financial bust occurs next year once the reality of the adjustment that France faces becomes clear.
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