Lecornu’s government and the 54 billion ‘Save France’ budget

At the end of June, French public debt reached 119 per cent of GDP, amounting to approximately 3.6 trillion euros. In recent days, the spread between French OATs and German Bunds has risen to nearly 120 basis points, a level not seen since 2012. Today, Sébastien Lecornu is presenting the draft budget bill to the Council of Ministers, featuring 54 billion in spending cuts and increased revenue to bring the deficit down from 5.4 per cent of GDP this year to the target of 5 per cent in 2027, compared with the 6.5 per cent which, according to the Prime Minister, would be the result without these measures. To secure approval, however, Lecornu will have to reach a compromise in the National Assembly, which has not had a majority since 2024 and whose members, with less than seven months to go before the presidential election, are already in campaign mode.

Lecornu’s plan to reduce the deficit excludes across-the-board tax increases. Firstly, the aim is to keep spending at 2026 levels, except for interest on the national debt and defence spending, and to cut funding for ministries and agencies. Secondly, the plan is to make changes to social security (healthcare, basic pensions and child benefits), aiming to cut its annual deficit from 22 billion in 2026 to 12–13 billion in 2027. The government is also proposing not to increase the index point – the figure used to calculate public sector salaries, which has been frozen since 2023. To achieve savings of €4.1 billion in the social security budget, Labour Minister Jean-Pierre Farandou clarified yesterday that only pensions up to €1,260 per month would be fully adjusted for inflation, while higher pensions would see smaller increases. A further €9 billion of the €54 billion in savings is expected to come from measures already introduced this year.

With Renaissance, the MoDem, Horizons and Les Républicains, the government has just over 200 MPs out of 577, so it does not have a majority. On the 2026 budget, which was only approved in February, Lecornu was saved by the Socialist Party in exchange for scrapping the 2023 pension reform, which would have gradually raised the minimum retirement age from 62 to 64; thus, ten days ago, the Prime Minister wrote to Socialist MPs to propose a new compromise on the budget. The Socialists are calling for a tax on large inheritances, something Lecornu’s government rules out, and on 27 September, Secretary Olivier Faure, who is standing in the presidential primaries, stated that “if nothing changes (compared to the current proposal, ed.), we will vote for a motion of no confidence”. Jean-Luc Mélenchon’s La France insoumise will vote for a motion of no confidence in the government in any case and, to balance the public finances, has even proposed writing off a fifth of France’s debt. Marine Le Pen, leader of the Rassemblement National (RN), has said that an imperfect budget is better than no budget at all – given that she could amend it if elected – but that she will vote against it if pensions are not adjusted for inflation. On 17 September, Lecornu promised not to invoke Article 49.3 of the Constitution, under which the budget is deemed approved without a vote by MPs unless the National Assembly passes a vote of no confidence, provided the parties refrain from filibustering. However, on 28 September, the Minister for Relations with Parliament, Laurent Panifous, described approval by a vote as “very difficult” and did not rule out the use of Article 49.3. In short, to get the budget approved, Lecornu will need either Le Pen or the Socialists: in an ordinary vote, where abstentions are not counted, it would be enough for RN to abstain for him to prevail against the ‘no’ votes from the left; under Article 49.3, it would be enough for one of the two not to vote in favour of the motion of no confidence. Otherwise, there is the ‘loi spéciale’, used last year, which would allow the state to enter 2027 with the capacity to finance essential expenditure (according to the Treasury, this would increase the deficit by half a percentage point of GDP).

Meanwhile, yesterday the yield on French 10-year bonds exceeded 4.8 per cent, the highest since 2008. According to Reuters, this reflects doubts about France’s public finances and political stability, whilst for Luis Garicano, an economist at the LSE and director of the Rhine Group, the proposal to write off the debt plays a major role: “This absurd debate has undermined both France’s credibility and the ECB’s room for manoeuvre, because the TPI (editor’s note: the instrument through which the ECB can buy a country’s bonds if its spread rises without economic justification) only counteracts ‘unjustified and disorderly’ market dynamics. But higher yields for countries that might not wish to pay their debts are not unjustified,” he added. The Governor of the Banque de France, Emmanuel Moulin, reiterated that the means to correct the deficit lie in the hands of the government and parliament. Today, Lecornu will present the plan.