France’s Barnier announces targeted tax hikes to plug budget deficit

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By Elizabeth Pineau, Jean-Michel Belot and Ingrid Melander

PARIS (Reuters) -Prime Minister Michel Barnier announced steep public spending cuts and targeted tax hikes for France’s biggest companies and wealthiest individuals on Tuesday, saying there was no other way to narrow a gaping budget deficit.

Barnier, appointed last month, faces the challenging task of plugging a huge hole in public finances at a time when the fragmentation of parliament and infighting in his minority government will make it hard to push through reforms.

France’s credibility with its European Union partners and in financial markets is at stake after its borrowing costs surged.

“The real sword of Damocles hanging over us is our colossal financial debt,” Barnier, a 73-year-old former minister and EU commissioner, told lawmakers as he set out his government’s plans, ignoring heckles from the hard-left France Unbowed.

France’s deficit was making it weaker in Europe, he added.

Tax increases would be targeted and temporary, he said, without giving further details. The dire state of public finances meant there was “no other choice”.

According to Le Parisien newspaper, Barnier was considering tax hikes of 15 to 18 billion euros ($17-20 billion), including 8 billion euros in increased corporate taxes as well as an additional levy on energy companies and share buybacks.

Barnier, best known abroad for being the EU’s Brexit negotiator, said he would reduce the budget deficit – which could top 6% this year – to 5% by the end of 2025 but would have to push back the target date for reaching the euro zone’s common 3% deficit goal to 2029 from 2027.

ING economist Charlotte de Montpellier said Barnier had been too light on detail to know if the timeline for cutting the deficit was credible and questioned whether the tax hikes would be temporary.

“… the likelihood of these tax hikes becoming permanent is significant,” de Montpellier said.

REFORMS

Barnier was appointed by President Emmanuel Macron nearly two months after a snap election delivered a hung parliament.

He promised more police officers on the streets and better control of France’s borders, and said he was open to “reasonable and fair” changes to the pension system – a key Macron reform, which was enacted in 2023 despite nationwide protests.

Addressing persistent concerns over the cost of living, Barnier announced a 2% increase in the minimum wage.

France would also pursue investments in the nuclear energy sector, including new reactors, he said.

Despite looking like the most unstable French administration in recent history, Barnier’s fragile minority government, that gathers centrists and conservatives, may last longer than many think, lawmakers and analysts have told Reuters.

Marine Le Pen’s far-right National Rally, which has given the government tacit support, likely has no real interest in owning an even bigger mess that might damage its presidential hopes in 2027.

That does not mean it will be easy, in particular for the 2025 budget, which Barnier needs to finalise within days and hand to lawmakers by mid-October at the latest.

“It is not clear who will be the most obstructive towards implementing his programme: coalition partners or the opposition,” Eurointelligence analysts wrote in a note.

Le Pen outlined red lines after Barnier’s speech, including standing tough on immigration. “Be courageous,” she urged him.

A left-wing alliance won most seats in the election but without an absolute majority and Macron chose not to appoint a prime minister from its ranks.

France Unbowed lawmakers, who say the vote was “stolen” and that there should be a left-wing prime minister, brandished their voter cards as Barnier spoke.

“The French did not vote for you,” some yelled.

Barnier acknowledged the election had resulted in a divided parliament but said his government had to push reforms through.

“The French would not forgive us for standing still,” he said. ($1 = 0.8974 euros)

(Reporting by Tassilo Hummel, Elizabeth Pineau, Benoit Van Overstraeten, Michel Rose, Makini Brice, Sudip Kar-Gupta; Writing by Ingrid Melander; Editing by Kirsten Donovan, Kevin Liffey, Richard Lough, Christina Fincher and Gareth Jones)