Investing.com - In its latest budget proposal for 2025, the French government remains optimistic, forecasting a reduction in the budget deficit from 6.1% of GDP in 2024 to 5% next year. However, according to Citi Research analysis, this ambition may be overly optimistic, especially considering the challenges faced in 2024 and the fact that the government's plan relies more on revenue growth than spending cuts.
This plan includes a combination of €60 billion in adjustments through a mix of revenue increases and spending cuts. However, these cuts are relative to the projected figures for 2025 rather than representing absolute reductions. The report highlights that the government aims to increase tax revenues by nearly 10%, including significant hikes in corporate tax, energy taxes, and taxes on high incomes.
One of Citi's main concerns is the reliance on these revenue increases, which may prove more difficult to achieve than anticipated. For example, the government's 2024 budget initially forecasted a 27% increase in corporate tax revenues - an ambitious target that has proven challenging due to slower-than-expected economic growth.
While the government is betting on a real GDP growth rate of 1.1% for 2025, Citi analysts are skeptical, suggesting a more conservative growth rate of 0.7% would be prudent, given the contractionary nature of the budget. A lower growth rate could further impact revenue projections, potentially leading to another year of missing targets.
Additionally, the report raises questions about the medium-term viability of the government's deficit reduction plan. While the government plans to bring the deficit below 3% of GDP by 2029, Citi asserts that this outcome would probably require structural reforms that might not have the necessary political support to become reality.
The political situation of the French government also adds to the uncertainty. Without a clear parliamentary majority, approval of the budget could face a deadlock, and the government might need to rely on Article 49.3, forcing the adoption of the legislation. This approach, while effective in maintaining the current government, could lead to contentious political debates in the weeks to come.
From a market reaction perspective, Citi believes the impact could remain limited, as much of this information has already been anticipated. French bond spreads have already widened, reflecting the market's awareness of these budgetary challenges. However, rating agencies may take a stricter stance, with Citi pointing out that Fitch's upcoming evaluation, expected this Friday, will be a critical first test of the government's credibility in managing its fiscal policy.