The announced fiscal consolidation effort will involve trade-offs between various socio-fiscal measures affecting households. Beyond their budgetary impact, these measures may have significant redistributive effects. To shed light on the possible trade-offs, we begin by outlining the framework set out in the 2025 Finance Act, and more specifically the differential levy on high earners. We then present an analysis of the budgetary and redistributive effects of various measures that may contribute to fiscal consolidation, on both the revenue and expenditure sides, including benefits and transfers to households.
Budgetary and redistributive effects of the 2025 social and tax measures
Reference Budget Outlook 2025 – Chapter 2
Presentation
Key Results
- The differential tax on high incomes (CDHR), introduced by the 2025 Finance Act, helps to reduce disparities in tax rates amongst the wealthiest.
- The CDHR generates €1.2 billion and is concentrated on the top 1 per cent of households, whose standard of living falls by 0.65 per cent. The average income tax rate for those liable for the CDHR rises from 14.2 per cent to 18.9 per cent.
- The budgetary gain associated with a one-point increase in VAT is estimated at 13 Mde, but the net effect on the public balance is reduced to 8.2 Mde once VAT paid by public authorities and the increases in expenditure resulting from the index-linking of benefits and pensions have been deducted.
- Under the indexation rules, a rise in VAT places a greater burden on working households than on other types of households, whose standard of living is protected by these mechanisms.
- A blanket freeze on pensions, social benefits and the income tax scale in 2026 would improve the budget balance by €4.4 billion assuming inflation of 1 per cent, and by €5.7 billion assuming inflation of 1.3 per cent. This freeze would have a regressive distributional effect, although it would apply across the entire income distribution.
View the presentation of the study given at the conference on 30 June
Update to the ‘blank year’ return estimate
The analyses and simulations presented in June 2025 in this study were carried out on the basis of an inflation rate of 1.3% for the year 2025, based on the Banque de France’s estimate of March 2025.
The estimate of the ‘blank year’ return was updated on 22 October 2025, based on an inflation rate of 1 per cent for 2025, drawing on the Banque de France’s updated estimate from September 2025.
| Inflation at 1% (September 2025) |
Inflation at 1.3% (June 2025) |
|
| Total “base year” | €4.4 billion | €5.7 billion |
| of which income tax revenue | €1.1 billion | €1.4 billion |
| of which pension payments | €2.4 billion | €3 billion |
| of which social security benefits | €0.9 billion | €1.3 billion |
This simply involves updating the calculation carried out in June based on the updated inflation estimates. The other parameters remain unchanged.
NB1: The ‘blank year’, as simulated by the IPP, corresponds to a freeze on the income tax scale, pensions and social security benefits.
NB2: This estimate assumes that supplementary pensions are not frozen.
NB3: The inflation rate used by the government in the draft budget is 1.1%.
