France’s budget faces a 0.5-point growth hole

French households got poorer in the second quarter. Their purchasing power per consumption unit (what a typical household can actually buy after taxes and inflation) fell 0.6%, according to revised national accounts from INSEE, France's statistics office (INSEE Q2 accounts). At the same time, INSEE cut its growth forecast for 2026 nearly in half, from 0.7% to 0.4% (INSEE September overview, INSEE June outlook). For a government that built its budget around 0.9% growth (French Treasury), the gap between assumption and reality is already wide enough to blow a hole in the public finances.

Fewer jobs, less spending, less tax

The downgrade was not a change in tone. Revised quarterly data published in late August showed the economy shrinking 0.2% in the first quarter and flat in the second, both worse than INSEE had assumed in June (INSEE Q2 accounts). That left France with barely any momentum heading into autumn.

The labour market is where this hits hardest. INSEE projects a loss of 52,000 salaried jobs during 2026, following 48,000 lost in 2025. Unemployment stood at 8.1% in the first quarter and is forecast to reach 8.6% by year-end (INSEE September PDF). When people lose jobs or fear losing them, they pull back on spending. France's household saving rate already sits around 17.6% (European Commission forecast: France), suggesting families are holding onto cash rather than putting it into the economy.

Less spending means less income tax, less VAT, less corporate tax. It also means higher unemployment benefits. Both push the deficit wider at the worst possible moment. France is already under an EU excessive-deficit procedure (a formal process requiring it to bring the deficit below 3% of GDP by 2029), and the gap currently sits around 5% (Council fiscal-path decision, European Commission forecast: France).

Borrowing costs make the bind worse

The ECB (the European Central Bank, which sets interest rates for the 20 countries using the euro) raised rates by 0.25 percentage points on 10 September (ECB decision). That increase does not hit France's existing debt overnight. The government's bonds carry an average maturity of about eight years (Agence France Trésor), so higher rates feed into the budget gradually, each time a maturing bond is replaced with a new, more expensive one. But the direction is clear: France's 10-year borrowing cost has climbed to levels above what Spain and Italy currently pay to refinance (ECB government bond statistics, To Brief).

Most French mortgage holders carry long fixed-rate loans and feel nothing today, according to Banque de France data on new lending (Banque de France lending survey). The squeeze falls first on new buyers, small businesses refinancing variable-rate credit, and the government itself.

Germany offers the clearest contrast. Growth there is similarly weak, perhaps 0.5%, but Berlin has enough fiscal room to launch large infrastructure and defence spending that the Bundesbank estimates could add 1.3 percentage points to growth through 2028 (Bundesbank projection). France has no equivalent capacity. Its deficit is already too large for a stimulus programme, and EU rules require it to consolidate.

That leaves Paris with a hard choice about the composition and timing of its budget. Cutting spending or raising taxes sharply while the economy is barely growing risks shrinking the very tax base the government depends on. But delay without a budget that names specific spending reductions or revenue increases, built on a realistic growth number, invites higher borrowing costs from investors who doubt the plan. France cannot follow its EU deficit path painlessly at 0.4% growth. How much of the adjustment falls on households and jobs depends on decisions Paris has not yet announced. The one thing that could ease the pressure is a retreat in borrowing costs, and that is not in France's hands.