What next for France’s finances after the government’s collapse?

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No matter what the French government had warned about, neither domestic nor international turmoil followed immediately after Prime Minister Barnier’s cabinet’s downfall and his resignation. But without a valid budget, the public deficit may rise further, as well as the uncertainty that is pushing up the refinancing costs of the country’s already enormous debt.

President Macron will now need to appoint a new Prime Minister, who will be tasked with forming a new government. But the chances of adopting a new budget before the year’s end are very slim.

If no budget is voted on by December 20, one of the possibilities is to extend the 2024 budget to 2025.

“A rollover of the 2024 budget to the entire 2025 fiscal year would likely deliver a government budget deficit of c.6.3-6.6% of GDP, up from an estimated 6.1% of GDP in 2024,” reads a fresh analysis of the British multinational Bank Barclay’s.

France is already under a considerable amount of pressure for overspending, the EU’s fiscal rules require each eurozone member state to keep its deficit below 3% of the GDP.

Barclay’s added in their analysis that the political landscape is too fluid to change their forecasts just yet, leaving the door open to a new government and quick approval of a 2025 budget by the first quarter of 2025 “that would deliver some fiscal adjustment”, read the analysis adding that: “In that case, we think that our general government deficit forecast of 5.8% of GDP, which already includes a looser fiscal stance and lower nominal growth forecasts than Mr. Barnier’s budget, would still be broadly achievable.”

Could there be a US-like government shutdown in France?

No, France has a legal framework, that prevents the government from shutting down.

To provide the necessary funds for the already approved commitments in the new year, the most likely scenario for any new or currently caretaking government appears to be to “introduce a special law to the Parliament before 19 December to ensure the continued collection of existing taxes,” notes the analysis.

As for the Social Security funds, the legislation isn’t clear as to what happens if the Social Security financing bill gets rejected. (The social security budget was forced through the National Assembly without a vote, by activating Article 49.3 of the Constitution, thus triggering the no-confidence vote against the government.)

French social benefits would not be ceased and contributions would be continuously collected. The most urgent issue appears to be the lack of authorisation to the operator behind the social security system, which usually raises funds on the financial markets up to an approved ceiling.

“The French Senate’s social security financing Rapporteur suggested earlier that the borrowing ceilings could be incorporated into an ad-hoc legislative vehicle, allowing social security funds to continue operating under the provisions set in the social security code,” says the analysis.

Local governments are left to be “self-governing”, according to article 72 of the constitution, so they set freely the amount and breakdown of their expenses in a no-budget scenario, according to Barclay’s expectations.

The bank’s analysis leaves room for the possibility of the 2025 budget being adopted in the early months of next year, “in which case we think that our fiscal forecasts would still be broadly achievable.”

Even with the current budget, Barclays expects no significant deficit reduction in 2025 and has been forecasting a deficit of 5.8% of GDP next year, well above the government’s target of 5%. The bank calculates with 0.7% economic growth, while the government counts on 1.1%.