France’s Budget Finally Forced Forward

Et voilà! After months of negotiations and no-confidence motions that ousted two prime ministers (PMs), France’s newest, Sébastien Lecornu, finally pushed through a Budget on 30 January.^[i] The final package seemingly contained few surprises, with most measures discussed in publications we follow for weeks. That said, we think it helps give businesses the lay of the land and eases political uncertainty for now, which our research finds stocks generally appreciate.

For those who haven’t followed, Lecornu has been trying to steer a budget through a hung parliament for months.^[ii] He initially said he wouldn’t invoke Article 49.3 of France’s Constitution to enact it without a vote, but that hinged on disparate parties with competing interests finding common ground.^[iii] When impasses proved insurmountable, he decided to move forward with Article 49.3. This wasn’t unprecedented, mind you, as more than 20 PMs under France’s Fifth Republic have done so.^[iv] But the Budget is central to the government’s surviving, true of many nations with parliamentary systems.

Historically, triggering Article 49.3 almost always spurs a no-confidence vote.^[v] And it did again—twice for the Budget’s spending measures and twice for its revenue-related ones—with the leftists and nationalist right doing the honours.^[vi] Lecornu survived all four, doing what France’s last two PMs couldn’t. Helping him was the centre-left Socialist party, which pledged to abstain or support Lecornu in return for several concessions, leaving other opposition parties short of the 289 votes needed to oust Lecornu’s government.^[vii]

And so France has a Budget—one with few surprises, based on our research. Reportedly, it includes around €9 billion in spending cuts across most ministries, though Interior, Justice and Defence were largely spared.^[viii] The Budget actually raises French military spending by €6.5 billion, a 10% boost from 2024.^[ix] With cuts elsewhere offsetting it, France’s projected deficit is 5.0% of gross domestic product (GDP, a government-produced measure of economic output)—down from today’s 5.4%.^[x] Given EU countries must target deficits below 3% of GDP, we don’t think the deficit’s direction of travel is shocking.^[xi] Nor is the fact he didn’t reach the target—few commentators we follow projected that, and we find breaching the limit usually carries little more penalty than angry finger pointing and a sternly worded letter from Brussels. In our view, increased military spending isn’t a massive positive surprise for Defence stocks, either. France pre-planned this and it is the trend across most of Europe anyway.^[xii]

On taxes, most coverage we saw focussed on the Budget’s abandoning previous plans to halve France’s corporate surtax on “large companies’” profits.^[xiii] This was a key concession for the Socialists, who demanded the effective tax rate remain between 30% – 35%.^[xiv] Yet these negotiations are now weeks old, so we think most of the surprise power is already gone. Only one corporate shift surprised commentators we follow: a new 20% tax on corporations’ non-professional assets (i.e., yachts, private jets).^[xv] However, scale shows a limited effect here—parliament projects the new levy will generate €100 million in revenues, a fraction of the multi-billions from other measures.^[xvi]

Parliament also extended its 20% minimum tax on high-income taxpayers until France’s deficit falls below the EU’s 3% target.^[xvii] Not great, in our view, but we see a silver lining: France will now index its personal income tax brackets to inflation rather than leaving them frozen (another Socialist concession).^[xviii] This means millions will avoid a stealth tax rise—a positive surprise, in our view, potentially making Brits envious as UK tax bands remain frozen.

In our view, budget clarity is a win for French households and businesses, as we find it enables risk-taking and investment. We think the high likelihood of a quiet legislative calendar ahead is another plus. France’s parliament is tightly gridlocked, with the opposition fractured and officials competing for position as Senate and presidential elections loom later this year and next. We are exceedingly doubtful of major legislation passing. Legislation requires compromise, which often alienates parties’ core constituencies. Grandstanding and inaction are generally more productive from an electoral standpoint, and whilst that can get noisy and frustrating anywhere, we find it reduces the risk of sweeping laws creating winners and losers. In our view, low legislative risk is a tailwind for stocks.

With this and Japan’s election over, the international political calendar is quiet. Denmark’s election could stir some noise, given the United States government’s recent pursuit of Greenland.^[xix] UK Prime Minister Keir Starmer also continues facing leadership challenge murmurs.^[xx] But overall, there aren’t many political happenings right now. This contrasts with America’s approaching midterm election, which we think provides a relative boost for non-US stocks.