France budget 2026 - government threatened with censure after proposals
Yesterday, the government unveiled its proposals for the 2026 budget. The Prime Minister's tone was intentionally solemn, emphasizing the unsustainable debt trajectory that France currently is on. In one of his initial statements, he reminded the public that France has been unable to present a balanced budget for 50 years. He warned that this might be the last opportunity to address the issue before it triggers a financial crisis. Consequently, the government reaffirmed its commitment to further reduce the deficit, aiming for 4.6% next year, compared to the anticipated 5.4% this year. This goal translates to a total savings of EUR 40 billion, and even more when factoring in increased defence spending, bringing the total to EUR 43.8 billion that needs to be found.
Here are some of the key initiatives mentioned:
The government must first minimize its expenditures. It plans to cut 3,000 public sector jobs by 2026 and eliminate unnecessary public agencies. Additional proposals in this direction have been made, but specific figures have yet to be disclosed
The state will also require local authorities to contribute approximately EUR 5 billion in savings
The "blank year" was widely anticipated, as it allows the government to reduce spending without making specific political decisions. The concept involves capping government spending at 2025 levels, without adjusting for inflation. According to the government, this measure should save around EUR 7 billion
The removal of two public holidays is proposed to boost production and increase revenues, expected to yield approximately EUR 5 billion
Additional measures were announced, such as reducing healthcare expenditures, though we are still awaiting accurate estimates of the savings these initiatives will generate
In the end, numerous proposals were made during yesterday's budget presentation, but it is likely that some will not pass, especially as negotiations with other political parties begin. The Prime Minister emphasized that the budget presentation commenced two months earlier than usual to allow parliamentarians ample time to discuss and reach a compromise.
Although Bayrou's speech aimed to foster open dialogue and discussion, most political leaders remain opposed to the announced measures, threatening the government with a ‘motion de censure’ (a vote of no confidence, which if passed by a majority will lead to the government resigning). It is unsurprising to hear both far-right and far-left factions calling for censure, but the most concerning reaction comes from the Socialist Party, which holds the decisive vote on whether the government remains in power. Following yesterday's announcements, the Socialists have demanded a complete revision of the proposals, stating that if the government does not conduct a full review, they will also move to censure it.
If the French government were to collapse again (marking the second time since the legislative election in June 2024), President Macron might be inclined to call for new legislative elections, given the current political deadlock.
As a result, we maintain our view that the risk of a government collapse and subsequent legislative elections remains high, reinforcing our bearish outlook on France. The country faces significant political constraints that impede the implementation of structural reforms necessary to consistently reduce government spending and, consequently, its public deficit. Thus, we expect French bonds to underperform compared to other EGBs. Over the past year, French bond yields traded closer and closer to peripheral bond yields, trading even higher now than Spain and Portugal (as shown below). This is clearly reflecting the country’s deteriorating fiscal outlook and political fragmentation. And based on current political reaction following this new budget, it is clearly not of the woods and is set to remain exposed to political shock and volatility in the coming months.
