• The French government has maintained its fiscal consolidation path and is still targeting a deficit of 4.6% in 2026. To reach this goal 43.8bn EUR in savings have been outlined in what is essentially an austerity budget. Key measures include a freeze on tax thresholds and pensions, cuts to healthcare spending, and the proposed elimination of two public holidays.
• PM Bayrou remains on course for an autumn showdown when parliament reconvenes in September, and the risk of censure leading to another snap election is high. But despite the fragmented nature of the parliament, it is plausible that the broad contours of the budget could still be adopted. For now, the prospect of fiscal consolidation and extended period of political uncertainty is set to remain a drag on activity. We look for GDP growth of just 0.5% in 2025.

The French government is sticking to its tough deficit reduction plan

The French government has now set out its proposal for the 2026 Budget with PM Bayrou confirming that the deficit target remains at 4.6% of GDP (from 5.4% this year). Achieving that will require 43.8bn EUR (1.5% of 2024 GDP) in measures. That figure was slightly higher than the originally-reported figure of 40bn after President Macron pledged an additional 6.5bn for defence over two years. But the broad package was not a surprise and the market reaction was muted. Further ahead, the target deficit path also remains unchanged from the 2025 budget. The target remains for a sub-3% figure (and compliance with the EU rules) by 2029. Debt is projected to peak at 118.1% of GDP in 2027, from 113.2% last year.

In short, this is an austerity budget. PM Bayrou was at pains to stress the gravity of fiscal risks, saying that France is in “mortal danger”, and announced a wide range of consolidation measures (see table below). These include the freezing of tax thresholds and welfare/pension scales (an “année blanche”) instead of an uprating with inflation. There is also a wider freeze on government spending, apart from in defence, and savings demanded from local governments. Healthcare spending was a particular area of focus for cuts with the announcement of higher out-of-pocket charges and tighter restrictions around sickness absence. There was also the headline-grabbing suggestion that two public holidays could be cancelled.

Some of these have more details than others (e.g. little was said about tax rises and a ‘solidarity’ contribution from higher earners at this stage). The implication is that the government anticipates changes after political wrangling over the summer. Indeed, if the aim is to cancel one public holiday then perhaps proposing two and subsequently backtracking on one might be the way to do it.

The French government is sticking to its fiscal consolidation plans

The proposed 43.8bn EUR squeeze includes a broad range of measures

Volatility and uncertainty are set to weigh on growth

Bayrou readily concedes these plans are at the mercy of opposition groups, and it seems likely that it will be hard to find common ground even if these measures are watered down after discussions. The package was immediately rejected by National Rally (RN) with Le Pen suggesting that her party would look to censure the government unless it changed its approach.

Everything points to a more volatile environment ahead with the course clearly set for an autumn showdown as things stand. The National Assembly will reconvene on 22 September and the draft budget must be presented by the first week of October. Bayrou has been keen to start the ball rolling on the budget early to foster discussion. But if there’s no progress over the summer then, in order to cut to the chase, he may look to use Article 49.3 again to sidestep a vote on the budget (which otherwise can be debated until December).

The opposition would likely challenge that with another confidence motion. If that were to be successful then we imagine that Macron would be moved to call another snap parliamentary election. Polling suggests that support for RN may have increased slightly since the previous election last July. It’s therefore possible that other opposition MPs would be reluctant to support a no-confidence motion if there’s a risk of losing their seat. Meanwhile, the bigger focus for the main parties is the 2027 Presidential election, and the fallout from another National Assembly election so soon after the previous one would be hard to predict.

So, while there were a lot of painful measures announced yesterday, it’s not impossible that this budget will be adopted in some form and Bayrou will survive. But it’s certainly a narrow path and things could get bumpy in October. A snap election can be held in as little as 20 days.

This leaves the outlook for the French economy in a tough place. There are no obvious growth drivers. As well as the fiscal consolidation path, consumers remain cautious and it’s hard to see much scope for investment given the elevated political uncertainty. US tariffs and related uncertainty remain an additional headwind. After a small contraction in Q4 last year, the French economy didn’t enjoy the stronger start to the year seen elsewhere in the euro area, with growth of just 0.1% Q/Q in Q1. For the year as a whole we see GDP growth at 0.5% – a marked slowdown from 1.2% last year.

French business sentiment remains relatively weak

Unlike elsewhere in the euro area, the French economy started the year with muted growth