2027 Budget: Deficit Held at 5%, 10-Year Government Bond Highest Since 2002

A 5% Deficit Target Dependent on Growth Recovery

Submitted to the National Assembly on October 1, the draft budget for 2027 aims to reduce the public deficit to 5.0% of GDP, compared to the expected 5.4% in 2026. While this goal remains far from the European benchmark of 3%, it already implies a significant budgetary effort: the government estimates the new recovery measures in the Finance Bill and the Social Security Financing Bill at 43 billion euros, contributing to a total effort of 54 billion euros when considering measures already in place.

The strategy also relies on an economic rebound. The Ministry of Finance forecasts a 1.0% GDP growth in 2027, following 0.5% in 2026. This scenario is slightly more optimistic than that of the Bank of France, which projected a 0.9% increase in 2027 in its September forecasts. Although the gap is limited, it is not insignificant: slower-than-expected growth would affect public revenues and could make achieving the deficit target more challenging. The Finance Bill itself acknowledges that the anticipated recovery helps to limit the deterioration of the cyclical balance.

Public debt nears 122% of GDP

Despite the reported reduction of the deficit, the debt would continue to rise. Public debt reached 119% of GDP at the end of the second quarter of 2026, or nearly 3.6 trillion euros. The government forecasts it will reach 121.7% of GDP in 2027.

The rate of mandatory contributions would simultaneously rise to around 44.2% of GDP, compared to 43.9% in 2026. The recovery of accounts therefore relies both on controlling expenditures and generating new revenues. The challenge for the executive branch is to reduce the deficit without further weakening an economy whose growth remains sluggish, especially as the increasing cost of debt gradually reduces fiscal flexibility.

The State Will Need to Raise 340 Billion Euros in Medium and Long-Term Debt

The French government's financing needs will reach 339.7 billion euros in 2027, according to the Agence France Trésor (AFT), compared to 311.7 billion in 2026, marking an increase of 28 billion euros in one year. This increase is mainly due to the 19.4 billion euro rise in the redemption of maturing securities, with several issuances made during the health and energy crises now requiring refinancing.

To cover this need, the AFT is planning a program of 340 billion euros in medium- and long-term net issuances after buybacks, compared to 310 billion in 2026. The outstanding short-term securities are expected to rise by 2.2 billion euros. France will thus need to rely heavily on the markets at a time when the cost of money is significantly higher than in previous years.

Rising Rates Begin to Significantly Increase Costs

The rise in bond yields is gradually impacting the government's budget. The AFT forecasts a budgetary debt cost of 72.9 billion euros in 2027. This phenomenon is gradual: not all French debt is refinanced every year, and part of the stock continues to benefit from historically low rates.

However, as the old bonds mature, they must be replaced by new loans issued under current conditions. Consequently, the average rate on the existing debt stock increases with a delay. The longer this situation persists, the more a significant portion of public revenue is absorbed by interest payments, which in turn complicates deficit reduction.

The 10-year OAT nears 5%, the highest since 2002

The tension is particularly visible in the bond market. In early October, the yield on the French ten-year OAT is fluctuating around 4.9%, after reaching its highest level since 2002. This increase is part of a global movement of rising sovereign yields, but France is also facing an additional premium related to its own budgetary and political vulnerabilities.

The gap between the French rate and the German ten-year Bund has also widened significantly. Reuters reports that it exceeded 130 basis points in early October, a level not seen since the European sovereign debt crisis in 2012. This spread is one of the most monitored indicators for assessing the relative perception of French risk compared to Germany.

The 2027 Presidential Election Becomes a Market Factor

In addition to budgetary fragility, the election calendar now comes into play. The uncertainty surrounding the 2027 presidential election contributes to the premium demanded by investors on French debt. Moody's, for its part, believes that political and parliamentary fragmentation complicates the country's ability to implement a sustainable consolidation of public finances.

Moreover, the campaign is bringing forth proposals directly related to debt. Jean-Luc Mélenchon, for instance, advocates for the cancellation of a portion of French debt securities held by the Eurosystem, which he presents as a measure involving the debt held by the European Central Bank and the Bank of France. It is not a proposal to default on all French creditors; however, this stance nevertheless fuels questions about the economic policy that might be pursued post-election in the event of a victory.

A new dissolution could extend political instability

The presidential election also does not guarantee the return of a stable parliamentary majority. The National Assembly remains deeply fragmented, and the next president might decide to dissolve it in an attempt to secure a majority that aligns with their program. This could lead to a new legislative phase, prolonging uncertainty about fiscal policy and the state's ability to meet the commitments outlined in the PLF 2027.

This scenario remains political and is not a given, but it is one of the possibilities that markets must now consider. Even after the presidential election, the issue of a majority in the Assembly could remain unresolved. For a bond investor, the question is no longer just about which budget will be approved for 2027, but what fiscal trajectory can realistically be maintained in the subsequent years.

Deficit, Growth, and Policy: An Increasingly Tight Equation

France is entering a period where budgetary, economic, and political variables increasingly reinforce one another. Higher rates gradually increase the debt burden; this rise complicates deficit reduction; a persistently high deficit in turn raises financing needs and may lead investors to demand an additional premium.

The relatively long maturity of French debt further slows the transmission of rate increases to the average cost of the stock, but it does not prevent it. The coming weeks will be closely watched: the progress of the budget bill in Parliament, auctions by the French Treasury Agency, the spread with Germany, growth forecasts, and initial directions of the presidential campaign. With the ten-year French rate nearing 5%, the issue of state financing has now become one of the central variables of French risk.