Yahoo Finance Le Pen victory will raise French debt to post-war high, warns Goldman Sachs
A victory for Marine Le Pen in France’s elections would trigger a surge in the national debt pile to a fresh post-war high, Goldman Sachs has warned.
National Rally’s (RN) plans for €38bn (£32bn) in tax cuts and extra public spending would increase France’s debt burden from 111.6pc of GDP to 120pc by 2027, the highest level on record since at least 1950, according to analysis by the investment bank.
This would take France’s total debt pile from £2.75 trillion to £2.96 trillion, according to Telegraph analysis based on France’s current GDP, although this calculation does not take into account GDP growth over this period.
French bond markets have been in turmoil since President Emmanuel Macron called a snap election after RN’s landslide win at the European Parliament elections.
Investors are spooked because, although the elections on June 30 and July 7 will not threaten Mr Macron’s position as president, they open the door to an RN victory in the National Assembly, which means Ms Le Pen’s party would have control over tax and spending.
The hard-Right party has said it would introduce a progressive income tax cut, lower production taxes and introduce VAT reductions on food and energy, measures which Goldman Sachs would cost the public purse a total of €30bn.
RN has said it will also bring in a wealth tax, but Goldman Sachs estimates this would raise only €2bn.
At the same time, while Mr Macron’s Renaissance party and its allies have pledged to cut public spending to bring down the deficit, RN has said it is planning a “sizeable fiscal expansion” and expects to increase public spending on security, defence and the judicial system. Goldman Sachs estimated these proposals will cost a further €10bn.
In a note to investors, Alexandre Stott, European economist at Goldman Sachs, said these measures combined would push the French debt burden to 120pc compared with a stabilisation at 113pc of GDP if Mr Macron’s party wins the election.
This would be exactly double the size of the French debt burden 25 years earlier in 2002, when it was just 60.3pc of GDP.
In turn, this means French bond yields would surge, dramatically increasing government borrowing costs.
Ms Stott said: “Our model includes a small feedback effect from fiscal policy to growth but does not consider the negative growth effects stemming from tighter financial conditions and the undoing of structural reforms.”
The third option is a “deadlock” scenario in which there is no clear winner at the election and there is a hung parliament, meaning no party is able to pass meaningful tax or spending measures. This would push national debt to 116pc of French GDP.
France was already grappling with a massive debt problem after it hit a record high of 114.7pc of GDP during the pandemic in 2020, according to the International Monetary Fund (IMF).
The debt pile had shrunk to 110.6pc in 2023 as Covid measures were unwound, but weaker-than-expected growth and new public spending pressures meant it jumped again to 111.6pc this year.
Jordan Bardella, the president of RN, also wants to lower retirement age, although he has said this will not be a “near-term priority” and will happen at a “later stage”.
There is “considerable uncertainty” over the likely election outcome, Ms Stott said.
