Thomas Gillet and Brian Marly, Sovereign and Public Sector

If the increase in defence spending to 3% of GDP or more is not offset by more stringent budgetary efforts and/or burden sharing at the EU level, France’s (AA-/Stable) deficit is likely to exceed 4% of GDP by 2029 and consequently, general government debt would increase above 120% of GDP. This is about twice our projection for Germany’s (AAA/Stable) public debt burden of around 60-65% of GDP by 2029.

As per 2023 military planning, France aimed to gradually raise spending towards 2% of GDP between 2025 and 2027, as part of the EU response to heightened geopolitical tensions, and as the sole nuclear power in the EU since Brexit.

With defence spending already up at 2% of GDP, above the average of EU NATO member states, continuation of the current trend would raise spending to almost 2.5% of GDP by 2029.

Reaching the possibly revised NATO target of at least 3% of GDP would put annual defence spending at EUR 100bn by 2029, almost doubling the 2023 level, which would be a major shift in France’s budget priorities.

Defence expenditure of EUR 59.9bn this year already exceeds the EUR 54.2bn in interest payments on government debt, but remains below the EUR 69.4bn allocated to pension payments and the EUR 88.6bn to education.

More gradual deficit-reduction, upward pressure on debt-to-GDP

France’s efforts to address its wide fiscal deficits and rising debt-to-GDP are likely to prove gradual. At the same time, there are intrinsic limits to how much further defence spending can rise in the near-term.

Capacity constraints on Europe’s defence industry and the European Commission’s Excessive Deficit Procedure to reduce France’s large deficits suggest that meeting any upwardly revised NATO defence-spending commitment will be a multi-year process.

Overall, the impact of higher defence spending on France’s fiscal outlook will primarily depend on the government’s budget strategy and coordination at the European level, notably with Germany, where a new government might be willing to support some joint-financing of defence spending, and the UK, as Europe’s only other nuclear power.

Scope’s next calendar review date is on 4 April 2025.