France debt hits record as election debate shifts to fiscal repair

France's public debt has risen to a record level during President Emmanuel Macron's two terms, unsettling investors and turning public finances into a major issue ahead of next year's presidential election. The debt stood at 119 per cent of gross domestic product at the end of June, and the government now expects it to rise to nearly 122 per cent of GDP next year.

With France already facing deep social tensions, candidates seeking to succeed Macron are under pressure to say how they would bring the debt under control. The government said on Thursday that France will again miss EU spending limits next year, even after proposing spending cuts of 54 billion euros.

Budget minister David Amiel said the cuts were necessary as the government prepares for what is expected to be a difficult battle in parliament. "We cannot sweep the dust under the carpet," he said.

One idea that has drawn particular scrutiny has come from radical-left presidential candidate Jean-Luc Melenchon, who has proposed cancelling French government bonds held by the European Central Bank to free up money for public spending and investment. Others on the right have called the proposal unrealistic, while far-right leader Marine Le Pen has called for reforms to "clean up" public finances.

"Freezing this debt means transforming it into perpetual debt - that is, debt with no repayment deadline and a low or zero interest rate," Melenchon said. "Freezing it is therefore effectively the same as cancelling it."

ECB President Christine Lagarde rejected the idea, saying it would be a "pure violation" of the EU treaty, which bans central bank financing of national governments. She also said that if France freezes its debt now, creditors could demand very high borrowing costs the next time the country seeks funds, or refuse to lend at all. "It's not because you repeat something that doesn't make any sense - either legally, technically, or financially - that it becomes something valid," she said at a September 10 news conference.

According to figures released this week by France's National Institute of Statistics and Economic Studies, public debt stood at 3.596 trillion euros at the end of June, equivalent to 119 per cent of GDP. France remained at 97.9 per cent of GDP in 2019, before the COVID-19 pandemic. France is the world's seventh-largest economy and a major industrial power.

France is not alone in carrying a heavier debt burden. Eurostat said general government gross debt in the euro area stood at 88.9 per cent of GDP at the end of the first quarter of 2026. France's debt remains lower than Greece's 143.5 per cent and Italy's 138.9 per cent, and also below the United States' 122.6 per cent. However, France does not have the advantage the US has from issuing the world's main reserve currency, which supports Washington's borrowing capacity.

France draws up a budget each year using revenue that mainly comes from taxes and levies paid by individuals and businesses. Expenditure covers public services such as education, the justice system and policing. For the past 50 years, expenditure has been higher than revenue, creating a budget deficit. France borrows to cover that gap and keep funding public services, and the total value of those loans makes up public debt. Deficits matter because investors ask for higher returns when lending to the government.

France last balanced its budget in 1973, while maintaining a generous welfare state and strong worker protections. Debt had stayed high for years, at more than 90 per cent of GDP from 2008 onwards, but it was manageable when growth was steady and interest rates were near zero.

That changed with the pandemic and then the energy crisis after Russia cut off most natural gas supplies following its 2022 invasion of Ukraine. The French government spent heavily on subsidies to support businesses and protect households from higher energy costs. As global interest rates rose sharply, France's debt climbed from 98 per cent of GDP in 2019 to 114 per cent in 2020.

As debt rises, debt servicing is taking up a larger share of the French budget. It accounts for about 7 per cent of state spending. With interest rates now much higher, interest costs are expected to rise above 90 billion euros in 2027, well above planned spending on defence at 63.4 billion euros and schooling at 65.5 billion euros.

Credit rating agencies have taken different views on France's outlook. Scope downgraded France's long-term ratings in September, saying, "A sustained deterioration in the fiscal outlook, characterised by rising general government debt, persistently high fiscal deficits and limited progress on structural reforms drive the downgrade." Fitch Ratings, however, said in August that it was maintaining France's sovereign credit rating at "A+" with a stable outlook. "France's ratings are supported by its large, diversified high-income economy, a sound banking sector and a diverse investor base," it said.

France's economy ministry says the country's debt is held by a broad range of investors: one-quarter by French investors, one-quarter by the Banque de France through purchases linked to ECB monetary policy, one-quarter by investors from the euro area, and one-quarter by investors from outside the euro area. The debt is held by insurers, banks, central banks and pension funds in countries where retirement systems are funded.

With debt at record levels, the budget still in deficit and borrowing costs rising, France's public finances are set to remain at the centre of political debate in the run-up to the presidential election.

With PTI Inputs