French finance ministry's deficit warning adds to Macron's political headache

By Elizabeth Pineau and Leigh Thomas

PARIS (Reuters) -France could see its budget deficit spiral unexpectedly higher this year and next if extra savings are not found, the finance ministry warned in a letter to lawmakers, as the euro zone's second-biggest economy lurches deeper into political crisis.

The deteriorating finances, which have also put Paris into EU disciplinary proceedings, add to pressure on President Emmanuel Macron as he struggles to name a new government two months after snap elections led to a hung parliament.

The financial shortfall means any new government could face tough choices between cutting spending and hiking taxes or losing credibility with France's EU partners and financial markets.

The document sent to lawmakers on Monday by the finance ministry indicated that the public sector budget deficit risks reaching 5.6% of economic output this year, leftist lawmaker Eric Coquerel, who heads the finance committee in the National Assembly, said in a late-night post on X. The caretaker government had been targeting a deficit of 5.1%.

The deficit could reach as much as 6.2% in 2025, Coquerel added, citing treasury calculations that 60 billion euros in budget savings would be needed to reach the outgoing government's deficit target of 4.1% for next year.

Several key taxes including income, corporate and value added sales tax were all coming in weaker than expected. A security crisis in the French pacific island territory of New Caledonia and parliamentary snap elections this year caused additional expenses, he added.

Outgoing Finance Minister Bruno Le Maire said it was an "absolute necessity" for France to push ahead with budget cuts and not let the deficit spiral out of control, according to one of the documents sent to lawmakers and seen by Reuters.

Coquerel pushed back, telling journalists that the situation was the result of successive tax cuts under Macron and could only be corrected by tax hikes rather than spending cuts.

Forecasting economic growth of 1% for both this year and next, Le Maire said 16.5 billion euros in spending had already been frozen for this year to offset the revenue shortfall and budget overruns.

"We've got to put an end to this policy of always counting on spending cuts," Coquerel hit back.

France has long fallen foul of EU rules requiring member states to keep budget deficits to less 3% of economic output, and Paris has not booked a surplus since 1974, three years before Macron was born. Its total debt of 110% of GDP also violates EU rules.

Under Macron, tax cuts on households, companies and capital income have reduced annual revenue by tens of billions of euros.

The caretaker government already froze 2025 spending last month at current levels in its provisional budget planning, although its successor is likely to rework the numbers, possibly drastically.

Macron is struggling to find a prime minister who would be compatible with both leftists and conservatives in parliament and who would not roll back pro-business reforms he has put in place since he was first elected in 2017.

If opposition parties are not satisfied with Macron's choice, they could vote a motion of no-confidence, potentially bringing down the new prime minister's government.

However, time is running short as the government is by law supposed to hand a draft budget to lawmakers to consider by October 2, although there might be wiggle room for a couple more weeks.

($1 = 0.9033 euros)

(Reporting by Elizabeth Pineau and Leigh Thomas; additional reporting by Tassilo Hummel; Editing by Toby Chopra and Peter Graff)