Still dealing with the past – Standard Chartered

The French government passed emergency legislation late last month to roll over the 2025 budget into 2026, ensuring that spending, tax collection and debt issuance are not disrupted this month. However, to achieve any material fiscal consolidation – which is key to avoiding any negative market reaction or potential further downgrades by credit rating agencies – a formal budget still needs to be agreed, Standard Chartered’s economists report.

Light at the end of the tunnel

“The failure to achieve this so far highlights the economic divide between the various political groups within the French parliament. A similar dynamic played out a year ago, when the 2025 budget was eventually passed in February last year; legislators may want to expedite the process this year to provide time for campaigning ahead of March municipal elections, but this will still require difficult political compromises.”

“Prime Minister Sebastien Lecornu is targeting sufficient fiscal tightening to bring the budget deficit down to at least 5.0% of GDP this year (from 5.4% of GDP last year). This is not insurmountable, but it will likely require hefty tax hikes and some spending cuts – meaning opposition from both the right and the left is likely to persist. Formal debates on policy changes are expected to recommence next week.”

“The government’s preferred method of adoption would be a budget that secures sufficient support in the French parliament – but given political divisions, this may not be possible. Usage of Article 49.3 – which allows the government to push through legislation without a formal vote – is becoming more likely as a result. This raises the risk of a no-confidence vote being triggered. To avoid a majority of MPs voting to bring down the government, Lecornu would need to provide enough concessions to one side – likely the Socialists – so that they abstain. This is achievable but not guaranteed – markets will remain focused on the risk of a government collapse that could follow this.”