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 January 30. The final package contained few surprises, with most measures widely discussed for weeks. That said, it helps give businesses the lay of the land and eases political uncertainty for now, which stocks should appreciate.

For those who haven’t followed, Lecornu has been trying to steer a budget through a hung parliament for months. 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. When impasses proved insurmountable, he broke the in-case-of-emergency glass and hit the Article 49.3 red button. This wasn’t unprecedented, mind you, as more than 20 PMs under France’s Fifth Republic have done so. But the Budget is central to the government’s surviving, true of many nations with parliamentary systems.

Triggering Article 49.3 almost always spurs a no-confidence vote. 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 honors. Lecornu survived all four, doing what France’s last two PMs couldn’t. Helping him was the center-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.

And so France has a Budget—one with few surprises. Reportedly, it includes around €9 billion in spending cuts across most ministries, though Interior, Justice and Defense were largely spared.^[i] The Budget actually raises French military spending by €6.5 billion, a 10% boost from 2024.^[ii] With cuts elsewhere offsetting it, France’s projected deficit is 5.0% of GDP—down from today’s 5.4%. Given EU countries must target deficits below 3% of GDP, the direction of travel on the deficit isn’t shocking. Nor is the fact he didn’t reach the target—few expected that, and usually breaching the limit carries little more penalty than angry finger pointing and a sternly worded letter from Brussels. Increased military spending isn’t a massive positive surprise for Defense stocks, either. France pre-planned this and it is the trend across most of Europe anyway.^[iii]

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

Parliament also extended its 20% minimum tax on high-income taxpayers until France’s deficit falls below the EU’s 3% target. Not great, but there is a silver lining: France will now index its personal income tax brackets to inflation rather than leaving them frozen (another Socialist concession). This means millions will avoid a stealth tax rise—a positive surprise likely making Brits envious.

Budget clarity is a win for French households and businesses, as it enables risk-taking and investment. Another positive? The high likelihood of a quiet legislative calendar ahead. Calling this parliament gridlocked is an understatement—with the opposition fractured and everyone jockeying for position as Senate and presidential elections loom later this year and next. There is virtually no chance 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 while that can get shouty and frustrating anywhere, it reduces the risk of sweeping laws creating winners and losers. Low legislative risk makes stocks smile.

With this and Japan’s election over, the international political calendar is quiet. Maybe Denmark’s election stirs some noise, what with Greenland factoring in. UK Prime Minister Keir Starmer also continues facing leadership challenge murmurs. But overall, there isn’t much happening. This contrasts with America’s approaching midterms, a relative tailwind for non-US stocks.