Le Pen proposes German-style debt rule to soothe French bond market

Marine Le Pen has unveiled plans for a budgetary rule that she said would put France’s public finances back on track.

According to Reuters, Le Pen aims with this step to ease investor concerns regarding her fiscal credibility.

The historic leader of the National Rally (RN) is leading in the polls for both rounds of the election scheduled to take place between 18 April and 2 May.

However, investors have scaled back their positions in French assets because they doubt that whoever wins the presidency next year will be able to bring the fiscal deficit under control.

The premium demanded by investors to hold 10-year French bonds over their German counterparts rose above 150 basis points on Friday to reach its highest level since late 2011, after the government’s 2027 draft budget provided little relief.

Writing in the French newspaper L’Opinion, Le Pen stated that her proposed “golden rule” would be submitted to a referendum and that, similar to Germany’s debt brake mechanism, it would bind lawmakers in annual budget legislation, with very limited exceptions.

The rule would require the fiscal deficit to narrow each year by at least half a percentage point of gross domestic product.

Le Pen argued that, through this mechanism, the budget deficit would fall from this year’s 5.4% to 2.9% in 2032, when the next presidential term concludes.

The debt ratio, which currently stands at 119% of GDP, would continue to decline until it reaches 60%, and would remain close to a balanced level.

Le Pen did not enter into details regarding when the referendum might be held or how the government would deliver spending cuts of this scale.

However, the French politician described the figures she outlined as a “minimum”, stating that her fiscal programme, to be unveiled on Tuesday (6 October), would reduce spending even more rapidly.

She reiterated her commitment to achieve 125 billion euros in savings over five years, noting that this figure would be net of tax cuts.

Le Pen argued that neither economic growth nor tax increases could repair the fiscal position.

Stating that lawmakers could permit a larger budget deficit only by a three-fifths majority, Le Pen added that a second consecutive exception would require a referendum.

She added that the High Council of Public Finance would approve the assumptions underpinning the annual deficit ceiling, and that the Constitutional Council would reject “insincere” budgets.

The French government presented its 2027 draft budget last Thursday.

The bill seeks to enact unpopular austerity measures that could narrow the deficit and reassure bond investors who have grown increasingly jittery ahead of next year’s presidential election.

Budgetary tightening would be carried out through freezes on public sector pay and on all pensions except the lowest, restrictions on local authority budgets, curbs on healthcare expenditure, and cuts to tax relief on employers’ payroll contributions.

While these measures avoid broad-based tax increases on households and businesses, the extraordinary surcharge imposed over the past two years on France’s largest corporations would be reduced by 30%.

“This budget puts us back on the path of fiscal consolidation through a substantial effort,” Finance Minister Roland Lescure told journalists, adding that the savings totalled 54 billion euros, of which 43 billion euros would represent fresh savings in 2027.

France’s benchmark 10-year borrowing costs rose to 4.96% on Thursday.

This stands close to 5% and represents the highest level recorded since July 2002.

Investors remain worried by political uncertainty ahead of the elections as they question the government’s ability to keep the deficit under control.