(Bloomberg) — France plans around €60 billion ($66.4 billion) in spending cuts and tax hikes next year as Prime Minister Michel Barnier seeks to claw back a widening budget deficit and bolster investor confidence in the country.
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The savings are required to bring the budget shortfall to 5% of economic output from around 6.1% this year, government officials said in a briefing to journalists on Wednesday, speaking on condition of anonymity in line with internal rules.
Slightly more than two-thirds of the total will come from spending cuts across ministries, local authorities and the social security system, they said. Just under €20 billion will be generated by temporary tax increases for wealthy individuals and large companies, as well as increased green taxation.
The extra yield investors demand to hold French debt over safer German peers retreated one basis point to 78 basis points after details of the budget were published, yet it remains close to the highest in more than a decade.
Getting the right balance of measures in next year’s budget is a delicate challenge for Barnier, whose premiership is tenuous given his centrist coalition doesn’t have the numbers to ward off a concerted opposition attempt to topple the government. Adding to the pressure, investors have been dumping French assets in recent months on concerns over slippage from deficit reduction goals and political stability after elections delivered a hung parliament.
The budget will be submitted to cabinet and parliament on Oct. 10 for debate and possible amendments. It is very likely Barnier will ultimately resort to a constitutional tool to bypass a vote as he has no majority and there is a convention in France for opposition lawmakers to oppose any budget bill.
However, if Barnier uses that tool, it gives lawmakers another chance of tabling a no-confidence motion to bring down the administration. The budget has to be adopted by the end of the year.
Some lawmakers in the narrow group backing Barnier’s minority government have warned they would not support tax increases that risk undoing seven years of pro-business policies during Emmanuel Macron’s presidency.
The government officials repeated Barnier’s line that the tax increases would be calibrated to affect only the largest companies and the very wealthiest individuals. But they also said green taxation would increase by around €1.5 billion, with possible measures regarding penalties for high-emission vehicles and levies on the most polluting forms of transport.
The deficit target in the initial text presented Oct. 10 will be 5.2% of GDP with some measures — including green taxation and €5 billion of the planned cuts to state budgets — to be introduced by amendment during parliamentary debate.
Other steps to reduce outlays include delaying the indexation of pensions to July 1 and limiting the increase in healthcare spending to 2.8% — a rate that was initially set at 3.2% for 2014.
In total, around half of the €40 billion of spending cuts will come from capping the budgets of state ministries. The rest will come from slowing local authority spending and the savings in the social security system.
–With assistance from James Hirai.
(Updates with details of parliamentary process starting in sixth paragraph.)
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