France can reduce its budget deficit to 3% of gross domestic product by 2029 despite political uncertainty and rising debt-servicing costs, Banque de France Governor Emmanuel Moulin has said, as investors remain concerned about the government’s ability to deliver a credible fiscal consolidation plan.
Moulin said France was making efforts to restore order to its public finances, arguing that the recent rise in government borrowing costs was driven more by political uncertainty than by a deterioration in the country’s fiscal position. However, he acknowledged that higher interest payments were making the task of reducing the deficit more difficult.
France remains subject to the European Union’s excessive deficit procedure, which requires member states with unsustainable budget shortfalls to take corrective action. The bloc has recommended that Paris bring its deficit closer to 3% of GDP, compared with 5.1% recorded last year.
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The gap between France’s current fiscal position and the EU’s benchmark highlights the scale of the adjustment required. Reaching the target would mean reducing the deficit by more than two percentage points of GDP, a substantial undertaking for a government operating amid political instability and pressure on public finances.
Speaking to CNBC’s JP Ong on the sidelines of the International Monetary Fund meetings in Bangkok, Moulin said the immediate priority was to secure parliamentary approval for a budget that would keep the deficit at the government’s targeted level of 5%.
“It’s really about political uncertainty and the question whether the budget will be adopted with [delivering] a 5% deficit, which is the objective of the government,” he said.
“And I think to reassure markets, it is important that there is a budget that is voted and a budget that sticks to the 5% deficit.”
His comments point to the importance of fiscal credibility in determining how investors assess French government debt. Markets need evidence that the government can secure approval for its budget and implement the measures required to meet its stated targets. Without that assurance, political uncertainty can translate into higher borrowing costs, increasing the burden on public finances.
Concerns about France’s political stability and its capacity to control public spending have weighed on its bond market this year. Those pressures have been compounded by broader market concerns stemming from the U.S.-Iran war and the resulting inflation risks, which have affected expectations for interest rates and government borrowing costs globally.
Moulin rejected the suggestion that the recent increase in France’s financing costs necessarily signaled a worsening fiscal position. Instead, he attributed the pressure largely to uncertainty over whether the government could pass a budget consistent with its deficit target.
Borrowing costs influence the speed at which a government can repair its finances. This means if investors demand higher yields to hold French debt, the government must devote more revenue to interest payments, leaving less room for public investment, services or other spending priorities unless it raises revenue or cuts expenditure elsewhere.
Moulin said France had previously demonstrated that it could consolidate its public finances and make substantial reductions in its deficit. He nevertheless acknowledged that the present environment was more challenging because debt-servicing costs had increased significantly.
“It’s about 10 billion [euros] per year more, so we need to take this into account in the consolidation,” he said.
The additional €10 billion in annual debt-servicing costs adds to the adjustment France must make. Even if the government succeeds in limiting other expenditure or increasing revenue, a larger interest bill can absorb part of those gains, complicating efforts to narrow the deficit.
The pressure also illustrates the interaction between political risk and fiscal policy. Uncertainty over budget approval can push up borrowing costs, while higher interest payments make deficit reduction harder. If that dynamic persists, the government may need to undertake deeper spending cuts or secure additional revenue to meet its targets.
A 2029 Target Faces a Difficult Path
Despite these obstacles, Moulin said France could still meet its longer-term fiscal objective.
“But I think it is possible to get back to a 3% deficit in 2029, which is the objective of the government,” he said.
The proposed timeline gives France several years to narrow the gap between its current deficit and the EU’s 3% benchmark. However, the target depends on the government’s ability to translate its stated intentions into an approved budget and sustained fiscal measures.
The immediate challenge is to keep the deficit at the government’s 5% target before pursuing further reductions. Failure to secure parliamentary support or deliver the promised adjustment could prolong investor concerns and make future borrowing more expensive.
The scale of the task also means that meeting the 2029 objective will require more than reassuring statements to financial markets. Investors will need to see evidence that deficit targets are being met and that the government can maintain its fiscal course despite political disruption.
Moulin’s remarks offer a defense of France’s capacity to restore its public finances, but they also identify the central constraint: higher debt-servicing costs are narrowing the room for maneuver just as the government needs to demonstrate fiscal discipline.