France unveils €54 billion austerity budget as debt hits 119% of GDP and bond yields rise

Spending cuts and revenue measures

The French government presented its 2027 draft budget, outlining €54 billion in spending reductions and fiscal adjustments to address the state deficit. The plan incorporates €43 billion in new public finance consolidation measures across various government sectors. Social security expenditure is slated for substantial restructuring, with the government aiming to halve the social security deficit to between €12 billion and €13 billion. Pensions account for €5.5 billion in savings through below-inflation adjustments or frozen indexation, while central government ministries face €2.5 billion in reductions, including cuts to the labor ministry. Local authorities will see allocations reduced by €5.4 billion. On the revenue side, Prime Minister Sébastien Lecornu ruled out broad tax increases, choosing instead to trim employer contribution exemptions, increase taxes on airport and motorway concessionaires by €800 million, and impose a new tax on sugar-sweetened food products.

Market pressure and sovereign debt

Pressure mounted across European sovereign debt markets as French borrowing costs rose relative to German benchmarks. The yield on 10-year French government bonds rose to 4.825% on Wednesday before reaching 4.89% on Thursday. The yield spread against 10-year German Bunds surpassed 1.2 percentage points, reaching its widest margin since the eurozone debt crisis in 2012. France's public debt reached 119% of GDP, the highest level recorded since 1946, following a 2025 debt ratio of 115.7% and a fiscal deficit of 5.1% of GDP. Annual interest payments on the national debt climbed to approximately €65 billion, becoming one of the largest expenditure items in the national budget. Weaker macroeconomic conditions further complicated fiscal planning, leading the government to revise its 2026 economic growth forecast down from 0.7% to 0.5%.

Political opposition and street protests

The budget proposals encountered swift opposition from municipal leaders, trade unions, and industry groups. Public sector workers, affected by a wage base freeze, joined firefighters in nationwide strikes and street protests on Tuesday, including demonstrations at the July Column in Paris. Local authorities labeled their €5.4 billion reduction disproportionate and excessive, while bakers and confectioners organized protests against the proposed sugar levy. In parliament, Sébastien Lecornu commands no stable majority in the National Assembly, where two previous prime ministers were removed by votes of no confidence. The fiscal debate unfolds ahead of the presidential election in April 2027, where purchasing power and living costs remain primary campaign concerns, and leading political figures including Marine Le Pen and Jean-Luc Mélenchon oppose substantial spending cuts.

Analytical perspectives and ECB role

Finance Minister Roland Lescure defended the fiscal proposals on Thursday, stating that the budget initiates consolidation through significant effort and maintaining that French credibility remains solid despite warnings from critics. Macroeconomic strategists pointed to political difficulties in implementing austerity reforms. John Hardy of Saxo Bank noted the public resistance to structural changes in French public spending.

We know from the history of French politics that it is very difficult to convince the public to raise the retirement age or make other serious reforms. Strong resistance appears immediately.

Market analysts also evaluated the potential role of the European Central Bank in stabilizing sovereign borrowing costs. Evelyne Gomez-Liechti of Mizuho Bank observed that central bank intervention thresholds remain elevated.

Investors do not want to buy French bonds until some factor restoring stability appears. The problem is that it is difficult today to indicate what that impulse would be.