France: Pension Reform to Spur Medium-term Fiscal Gain at Governance Cost

Thomas Gillet
Published: Mar 24, 2023, 09:52 GMT+00:00

The government’s decision to force through unpopular pension reform improves the resilience of public finances in the long term but risks further political fragmentation and weaker reform momentum.

France: Pension Reform to Spur Medium-term Fiscal Gain at Governance Cost

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France’s pension reform, centred on raising the age of retirement to 64 from 62 should ensure the progressive rebalancing of the pension system by 2030 given unfavourable demographic trends and a widening fiscal deficit. The reform sends a strong signal to European partners and international institutions of France’s intention to preserve medium-term fiscal sustainability and introduce supply-side reforms.

Still, the fiscal dividends from the reform will be lower than expected. The reform aims to generate EUR 18bn in annual cost savings by 2030 but falls short of President Emmanuel Macron’s election pledges because the government agreed to water down the legislation in the hopes of securing the parliamentary support of the conservative opposition party, Les Républicains.

Most of Les Républicains agreed on a pension reform they historically supported but growing dissension within the party made a parliamentary vote too uncertain to be called.

Unable to count on Les Républicains, Macron’s government had to sidestep a vote in the National Assembly to pass his pension bill, which leaves more limited room for manoeuvre in advancing his reform agenda and scaling up long-term investment spending.

Passing the legislation by force, while far from uncommon under France’s Fifth Republic, raises the risk of further political fragmentation, given the party of the president lacks an absolute majority in parliament, where far-right and far-left parties have unprecedented presence.

Figure 1: Macron’s party would lose seats in parliament in case of an early election

Number of seats, change in comparison to June 2022 legislative election

Source: Toluna Harris Interactive pour Challenges, Scope Ratings

Structural Reform Momentum Likely to Slow

Macron’s government survived no confidence votes called by the opposition following the pension reform as Les Républicains to date have mostly refused to join forces with the far right or green-left coalition. Macron is thus unlikely to dissolve parliament and call new elections given his Ensemble party’s lack of popularity.

Instead, a cabinet reshuffle, including the appointment of a new prime minister, is the most likely option to breathe new life into the government. In the meantime, protests, such as strikes by public-sector staff, are likely to continue.

Even in a worst-case scenario for the government of having to backtrack on the reform, it is worth noting that the pension question is far from the most important determinant of the country’s fiscal outlook despite a cumulative deficit forecast at EUR 60bn-EUR 80bn by 2030.

Pension Deficit Only One of Many Pressures on State Finances

For example, interest payments, rising due to tighter ECB monetary policy, will likely range from EUR 60bn to EUR 90bn annually by 2027. The pension deficit is also small compared with the cost of measures introduced as a response to the pandemic crisis (EUR 165bn) and the energy shock (around EUR 100bn), as well as President Macron’s commitments to invest more in nuclear power (EUR 50bn) and defence (EUR 100bn by 2030).

It will require more than a new prime minister to energise the reform programme. The government is in danger of facing legislative gridlock in any fresh efforts to boost growth potential and further stabilise public finances, which could otherwise help Macron take a strengthened leadership position in determining policy at EU level.

Durably weaker reform momentum, the unfavourable economic outlook and sustained pressure on public finances exerts downside pressure on France’s AA/Stable Outlook credit ratings. Scope’s next review is on 26 May 2023.

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Thomas Gillet is an Associate Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

About the Author

Thomas Gilletcontributor

Thomas Gillet is Associate Director in Scope’s Sovereign and Public Sector ratings group, responsible for ratings and research on a number of sovereign borrowers. Before joining Scope, Thomas worked for Global Sovereign Advisory, a financial advisory firm based in Paris dedicated to sovereign and quasi-sovereign entities.

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