International

French deficit drops, auditor urges stronger action

PARIS: A dive in the central government budget deficit last year due to one-off accounting items did not conceal signs Wednesday that France’s underlying spending remains stubbornly high, leaving a stiff task for the victor in May’s presidential election.

Official figures showed the central government’s deficit fell by a third in 2011, putting France on track to beat its target of an overall state deficit of 5.7 percent of GDP. The state deficit combines the figures for the central government, social security system and local authorities.

However, the government’s deficit drop was mainly due to the end of huge exceptional accounting charges booked in 2010 for future investment spending and tax reforms and does not address the structural problems that has seen France’s credit rating cut and increasingly scrutinized in Europe’s debt crisis.

The country’s state auditor warned that whoever wins May’s presidential polls will need to take much tougher steps. “At this rate, it would take 10 years to get to budgetary equilibrium,” said Didier Migaud, first president of the Court of Auditors. “The biggest steps will remain to be taken in 2013 and 2014.”

Still, the central government’s deficit fell to 90.8 billion euros last year, 4.5 billion euros better than forecast. With tax revenues flat, the fall was due to a 14-percent drop in spending on the year to 365.4 billion euros.

However, spending in 2010 was boosted by a 32 billion euro accounting charge for a future investment program covering everything from industry to teaching, and an exceptional one-off payment to regional governments to cover the cost of a reform to a local business tax. Excluding these items, spending was little changed year-on-year.

Sarkozy had said recently that the 2011 state deficit – including social security and local authorities – may have dipped as low as 5.3 percent of GDP, putting France well on track to meet this year’s target of 4.5 percent.

But the Court of Auditors – a quasi-judicial body charged with reviewing public finances – warned in an annual report that the government last year took only one-tenth of the structure reforms required to keep its promise of balancing the public finances by 2016.

The eurozone’s second largest economy – stripped of its AAA credit rating by Standard & Poor’s at the start of this year – is struggling under heavy wage costs and racked up its largest trade deficit on record in 2011 at nearly 70 billion euros.

An injection of European Central Bank cash into the banking system has helped ease some of the market pressure on France since, but economists warn low growth in coming years will make it all but impossible to bring debt levels down without painful reforms of welfare and core public services.

The Bank of France said in its monthly report Wednesday that its 2 trillion euro economy would see zero growth in the first quarter.

With Sarkozy trailing his Socialist rival Francois Hollande ahead of the two-round elections in late April and early May, Migaud said his message was addressed to all political parties.

Stripping out cyclical economic effects, the Court of Auditors estimated that France had reduced its structural deficit to 4.5 percent of GDP in 2011, down by a mere 0.5 of a percentage point from the previous year.

“Our country has to escape as quickly as possible from the dangerous position it finds itself in because of its debt levels,” Migaud told a news conference, urging the government to urgently lay out detailed plans for meeting its deficit targets.

France’s revised 2012 budget, approved by the Cabinet Wednesday, showed the cost of contributing to the European Stability Mechanism – the eurozone’s permanent bailout fund due to take effect this year – would raise France’s debt to 89.1 percent of GDP this year.

The national debt would now not start to decline until 2014, one year later than previously forecast, after peaking at 89.3 percent of GDP in 2013, the budget forecast.

The court urged the government to slash 15 billion euros from the myriad exemptions that litter France’s complex tax code, such as tax breaks for investment in its overseas territories which cost an estimated 1.3 billion euros last year.

France has one of the highest levels of public spending in Western Europe, due to its generous welfare system, running at around 55 percent of GDP.

“The recurrent deficits of our social security system, which have no equivalent elsewhere in Europe, are anomalies and must be eliminated,” Migaud said.

 
A version of this article appeared in the print edition of The Daily Star on February 09, 2012, on page 6.

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