France’s Persistent Political Turmoil Deepens Fiscal Uncertainty –Fitch

France’s latest political turmoil highlights the extent of the political and policy uncertainty stemming from the fractured National Assembly, Fitch Ratings says.

According to the rating agency, high uncertainty that limits the scope for substantial fiscal consolidation that could contain France’s high and rising government debt ratio was a key driver of the downgrade of the sovereign rating to ‘A+’/Stable from ‘AA-’/Negative on 12 September.

President Emmanuel Macron reappointed Sebastien Lecornu as Prime Minister on 10 October, just four days after Lecornu’s resignation. Lecornu presented his new government’s 2026 budget proposal on 14 October.

This targets a deficit of 4.7% of gross domestic product (GDP), down from 5.4% this year via measures including freezing pensions and social security payments, maintaining income tax thresholds and a temporary surtax on high earners.

But the budget would also suspend France’s 2023 pension reforms until 2028, after the next presidential elections.

Fitch said recent developments indicate that political dynamics have continued to limit visibility around consolidation prospects since its rating review.

Suspending pension reform improves the chances of a 2026 budget passing this year that, depending on its final details, could lead to modest deficit reduction.

Lecornu’s proposal will now be debated in parliament and may be amended. While this makes the no-confidence motion that some opposition parties had called for unlikely, the Socialist Party said Lecornu’s budget proposal would have to change, and has reiterated its call for a contentious wealth tax proposal (the ‘Zucman tax’) to be enacted.

If a 2026 budget passes, Fitch said ti will assess its composition and fiscal impact relative to its 12 September baseline, which assumes consolidation worth 0.5 percentage point of GDP in 2026 and 2027.

The rating agency said this is just sufficient to offset higher interest costs, keeping the fiscal deficit stable at 5.5%-5.6% of GDP, but general government debt continues to increase towards 121% of GDP by 2027.

Amid efforts to build consensus around fiscal consolidation, the debate around France’s 2023 pension reform has reopened and intensified.

Lecornu, who has proposed a national conference on work and pensions with social partners, said suspension will cost EUR400 million in 2026 and EUR1.8 billion in 2027 – a total of just 0.07% of GDP at current prices, which he has pledged to offset with other measures.

However, Fitch believes suspension increases the risk of a revamp or reversal of the 2023 pension reforms after the 2027 elections. This would increase structural pressures on already weak public finances.

France’s Court of Auditors estimates savings from the 2023 reforms at EUR10 billion by 2030 and forecasts that post-reform the state pension system will still record annual deficits of around EUR6.6 billion over the coming five years, rising towards EUR30 billion by 2045.

Without a budget, a broad freeze on most departmental spending at 2025 levels and tools available under the Organic Finance Law – such as credit cancellations – would enable some control over expenditure.

The potential for further political volatility means early parliamentary elections, before the 2027 presidential elections, cannot be ruled out.

“The fiscal implications of the different blocs’ priorities, and the credibility of their consolidation plans, would be an important factor in our sovereign credit analysis, as would prospects for easing political deadlock.

“Persistent political uncertainty has, in Fitch’s view, diminished France’s otherwise strong institutional framework.

“Prolonged political and fiscal uncertainty could present risks to our economic forecasts through potential impacts on business and consumer confidence.

“An anticipated recovery in consumption is the main reason we anticipate improved, albeit modest, growth. At our September review, we forecast real GDP growth of 0.6% in 2025, rising to 0.9% in 2026 and 1.2% in 2027, reflecting low estimated trend growth of 1.1%”, Fitch stated. PIA: Reps Urge Oil Companies to Comply With Extant Laws