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13th Apr 2024

France's Le Maire 'goes German' with austerity budget

  • French finance minister Bruno Le Maire announced another round of budget cuts to commit his country to German-style deficit reduction (Photo: Dean Calma / IAEA)
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The French ministry of finance announced on Monday (19 February) that it would cut another €10bn out of this year's budget, amid weak growth and ongoing monetary tightening.

"The savings announced will allow us to stay on course for debt reduction," finance minister Bruno Le Maire said in a news conference announcing the measures.

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Updated government projections expect the economy to grow by one percent this year instead of the earlier forecasted 1.4 percent.

Although still "positive," said Le Maire, to honour commitments made to reduce deficits to 4.4 percent the French government has decided to cut spending.

It is a major blow to French president Emmanuel Macron, who had set out to reduce deficits without austerity measures.

According to the Monday announcement, €5bn will be shaved off budgets across ministries.

Further cuts to state support for industries and green subsidies for households, worth €2bn in total, have also been announced.

"We won't be raising taxes," he also said. "We have cut them and won't deviate from this line. French people can't bear any more tax."

But many of the measures announced so far will be borne by households.

At the end of last year, the French government already announced €16bn in cuts for the 2024 budget, of which €10bn came from scrapping caps on power and gas prices for consumers.

More spending cuts could be announced in the summer, the ministry said.

Austerity is back

The announcement comes as Paris is under pressure from other EU countries, notably Germany, to reduce deficits as part of the EU's revamped fiscal spending limits agreed on at the beginning of this month.

Although the new rules are more flexible than the previous ones, analysts still expect many countries, especially France and Italy, will have to make deep cuts to bring deficits in line with EU rules.

This has led some to fear a return of the worst austerity years following the financial crisis of 2008 when EU governments tried to cut their way out of the crisis but ended up only making deficits worse.

Portugal and Greece suffered gruelling austerity for most of the 2010s, partly enforced by the EU, and were reportedly not happy with the compromise on fiscal rules.

While these countries cut their budgets the most between 2009 and 2019, they also saw the largest increases in their debt-to-GDP ratios, leading many to criticise spending cuts as an effective way to bring down debt.

In a paper published after the deepest cuts were over in 2013, the economist Olivier Blanchard, who was then the International Monetary Fund (IMF) chief economist, admitted that his team had underestimated the negative effect of government spending cuts and found that every euro that governments cut from their budgets actually reduced economic output by €1.50.

Although French cuts will affect most ministries, defence spending is set to increase significantly.

Last summer, the French National Assembly approved a €413bn military budget until the end of the decade, a 40 percent increase compared to the €295bn budget for 2019 to 2025.

Therefore, some criticised the budget cuts for targeting households and climate funds. The €400m cuts to a fund meant for renovating schools, carpooling infrastructure and other regional environmental projects were especially deemed unfair.

"Le Maire has chosen injustice," said Anne Bringault, programme director at France's Climate Action Network on social media. "Budget cuts will penalise the most vulnerable and come at the expense of the climate and purchasing power."

Indeed, an analysis of 17 wealthy OECD countries showed that long-term investments, which include research and development but also climate investments, are one of the first casualties of this renewed focus on debt reduction.

Analysis

How austerity is pushing Europe to extremism

A recent study convincingly shows that for every one percent cut in regional public spending, the vote share of extreme parties increases by 1.5 percentage points in the first year and three percentage points two years after the cuts.

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