French Premier Mulls Taxing Large Firms to Reign in ‘Grave’ Debt

(Bloomberg) -- Prime Minister Michel Barnier opened the door to taxing wealthy individuals and large companies in a bid to repair France’s massive budget deficit and reassure international investors.

The new premier said in an interview on France 2 television Sunday that he wanted to avoid raising taxes on the middle class and workers, but emphasized that there needed to be a collective effort to cut spending and to turn around France’s “grave” debt situation. 

Parties on the left and right have threatened to bring down the newly formed government, raising the risk of a swift collapse that would further cloud the outlook for France’s stretched public finances. Further complicating the situation, some lawmakers backing the new administration have said that one of their conditions to support Barnier is that he doesn’t boost taxes. 

“In the necessary, national effort to repair the situation, I won’t exclude that the richest participate,” Barnier said. “In the national effort, some very big companies, multinationals that are working well, can also contribute.”  

The issue is particularly explosive for President Emmanuel Macron’s centrists, who have argued that seven years of keeping a lid on taxes is a cornerstone of economic policy that slowly transformed France’s fortunes, bringing jobs and foreign investment.

But Barnier is increasingly cornered as Macron’s decision to dissolve the lower house and months of political gridlock have undermined investor confidence, driving up France’s borrowing costs compared with other European countries. Making matters worse, the nation’s fiscal situation deteriorated further over the summer under the watch of a caretaker government.

Since Macron called a snap election on June 9, the benchmark Paris stock index is down more than 6%, making it by far the worst-performing major market in Europe. The country’s government bonds have also been sliding relative to other European countries, taking the spread between French and German 10-year yields, a proxy for French risk, up about 30 basis points since before the elections.

“Our country is in a very grave situation — €3 trillion ($3.3 trillion) of debt and €50 billion in interest to pay a year,” Barnier said in the interview. “A lot of our debt is on international markets — we must preserve France’s credibility.”

Barnier’s cabinet, which was announced Saturday evening, is the fruit of more than two months of factious negotiations after Macron’s bid to bring stability to parliament with an election achieved the opposite: a National Assembly split into three bitterly opposed blocs, each incapable of governing alone. 

The new government hands Barnier an awkward patchwork of conservatives and centrists who haven’t always worked smoothly together. What’s more, even if he can hold together the groups, as a unit they fall far short of being able to thwart a no-confidence vote that would bring down the government.

“The question is not what government we’ll have in France but when it falls,” Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management, said last week before the administration was announced. “As long as there’s going to be this French premium, we will find some reluctance from investors to come back.”

The left-wing New Popular Front alliance – which holds the largest number of seats in the lower house – has pledged to topple the government at the earliest opportunity. It doesn’t have the votes to do so alone, but it could get the support of the far-right National Rally, whose leader, Marine Le Pen, has become the de facto king maker for the new administration.

The National Rally, which is the single largest party in parliament, indicated that the new government has “no future” and is a return of “Macronism.”

Budget Pressure

The priority for Barnier’s administration is to construct a 2025 budget bill in the coming weeks to tackle the expanding deficit. However, it’s already likely to miss the Oct. 1 deadline to present a bill to parliament. Compounding the pressure, the European Union has put France in a special procedure designed to enforce stricter fiscal discipline in countries deemed to have excessive debts and deficits.

Without new measures to curb spending or increase tax, France’s budget deficit could reach 6% of economic output this year, Les Echos reported on Friday, citing new forecasts from the finance ministry. European Union rules cap it at 3%.

Speaking Sunday on France Info radio, National Rally Vice-President Sebastien Chenu said his party’s decision to support a no-confidence bill would depend on the budget and Barnier’s approach. 

“We said we wouldn’t immediately censure the Barnier government,” he said. “On the other hand, seeing the profile of this government, Barnier hasn’t scored a good point.” 

Barnier is due to address the parliament on Oct. 1, which will be the first opportunity for a party to call for a no-confidence vote.

The prime minister has picked Antoine Armand, a 33-year-old with limited political experience, to take on the role of finance minister. He’ll be flanked by Budget Minister Laurent Saint-Martin, the 39-year-old head of Business France, which promotes export growth and foreign investment.

Saint-Martin will report directly to Barnier, a sign of the importance the new prime minister attaches to pushing through a budget.

“In the current fiscal context, excluding outright some exceptional and targeted taxes would not be responsible,” Armand said in an interview with Le Journal du Dimanche. “But that doesn’t make it a doctrine, and doesn’t resolve our problem: we must cut public spending and make it more efficient.” 

Barnier scored one high profile appointment with the leader of the Republicans in the Senate, Bruno Retailleau, who’ll be the new interior minister. The 63-year-old has been a vocal critic of Macron’s past governments, demanding more fiscal discipline and taking a more conservative stance on social issues. 

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