As France now contends with a growing fiscal deficit, the country’s fiscal landscape is getting more complicated. This year and last, the country’s fiscal deficit exceeded original targets by double digits. Despite the commendable progress, this scenario raised serious alarm bells regarding the sustainability of its economic policies. Yet it spends more publicly than most European nations, despite considerable savings to be made on public spending. As the country tries to return to fiscal equilibrium and take care of its citizens, its fiscal strategies are coming under increasing scrutiny.
In 2023, France’s fiscal deficit was 0.4 pp of GDP above the originally planned targets. The picture got even worse in 2024, exceeding even our pessimistic expectations by an astonishing 1.4 percentage points. The national government hopes to reduce this shortfall to 5.4% of GDP by 2025. Rising economic headwinds, including a pronounced downturn in the pace of growth, continue to put serious strains on this budget goal.
France’s public spending is still exceptionally high by the yardstick of the country’s European neighbors. The country’s social security system continues to be a key pillar of its welfare state. It has a higher life expectancy than any nation in the Western Hemisphere, with the exception of Canada. The pressure on social spending has increased dramatically, resulting in a sharp increase in these expenditures’ share of GDP. We haven’t seen levels like these since 2014—before the onset of the COVID-19 pandemic, that is.
Simply put, in 2024, social benefits have increased more than inflation. This illustrates France’s profound commitment to supporting its citizens through economic ups and downs. Pensions, especially the new state pension, have been key in buffering the impact of current inflationary pressures experienced in 2023. This issue is the government’s role in protecting its most vulnerable communities.
France’s interest burden rose sharply through much of the period. It climbed to 2.1% of GDP in 2024, an increase from 2% in 2022. These financial strains further underscore the need for smart reforms to deliver fiscal sustainability in the future.
Despite the grim current situation, the government is hopeful. Medium-term plans are already in place to start fiscal consolidation in 2025. That’s why this year’s budget focuses on dramatically increasing revenues. It will serve as a guide to help us refine our stated goals to better match our eventual intentions. France’s authorities seem to understand that keeping a balance between expenditure and income is necessary for preventing the risk of future deficits.
Corporate taxes stabilized in France in 2024 as a result of the strong corporate margins observed in recent years. This unexpected stability will be welcome relief as the new government attempts to steer a path through a complex fiscal landscape.
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If France is to stay on course with its fiscal targets, close watch and incisive correcting moves will be key. The challenges awaiting the French government are indeed daunting over the next few years. It needs to pair strong social investment with still being fiscally responsible.