French Plans to Fix ‘Worrying’ Finances Lack Credibility, Auditor Says

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(Bloomberg) — France’s state auditor warned that current plans to repair “worrying” public finances already lack credibility just as political groups with expansive tax-and-spend policies jockey to form a new government after snap elections.

President Emmanuel Macron’s outgoing administration pledged new spending cuts and revenue-boosting measures in April to get back on course with derailed plans to bring the budget deficit within 3% of economic output in 2027.

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But state auditor Cour des Comptes said Monday that the updated program relied on “particularly optimistic” growth forecasts, unprecedented spending cuts, and imprecise measures to boost tax revenue. The government also seemed not to have accounted for the depressive impact of such tightening, it said.

“This trajectory doesn’t seem to be very credible or very realistic,” the Cour des Comptes said. “French public finances are therefore in a worrying situation.” 

The review is another red flag for the euro area’s second-largest economy, where the budget is already shrouded in uncertainty after a turbulent election delivered a hung parliament. At one point during the campaign, the selloff in French bonds drove the premium on the country’s borrowing costs compared with Germany to the highest since the region’s sovereign debt crisis over a decade ago.

While market tensions have since eased as no party won the absolute majority required to have a free rein over the budget, a left-wing coalition that pledges a vast increase in public spending is in the ascendancy after taking the largest number of seats.

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Still, the New Popular Front would need to water down its proposals to form any kind of government capable of commanding a majority. Current Finance Minister Bruno Le Maire has opened the door to building consensus for specific projects, but limited the scope for compromise by warning that the left’s manifesto is a danger for France and Macron’s plans for fiscal consolidation must not be weakened.

In a written response to the auditor’s report, Le Maire and budget minister Thomas Cazenave said the finance ministry shares many of the observations. But they said the government has made unprecedented efforts to correct the budget this year and the high debt and deficit in 2023 were a result of choices to protect economic growth and tackle inflation.

“More restrictive and lest protective choices on public finances would certainly have created more social difficulties and less growth and wealth creation, with no guarantee that the final balance of public finances would have been better,” Le Maire said. 

Bank of France Governor Francois Villeroy de Galhau has also cautioned that there is no “hidden treasure” and said the next government would undermine the country’s sovereignty if it were to dig deeper deficits.

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Even before the election, France was in investor cross-hairs after S&P Global Ratings downgraded the country. In the buildup to the vote, the European Union also instigated a process against Paris that’s designed to enforce greater discipline in member states with excessive debts. 

The Cour des Comptes said that France is increasingly diverging from other European countries in its efforts to close down the deficit after the Covid pandemic and energy crisis. Higher debt costs constrain all other spending and investment, and leave France “dangerously exposed” if there is another economic shock, it said.

“It is crucial, as the current stability program foresees, to return the deficit under 3% of economic output and get debt on a downward trajectory” in line with EU rules, the auditor said. “But this effort should be made on the basis of more realistic and more credible forecasts than is the case today.”

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