France deficit plan treads fine line, betting on growth

French junior Budget minister Christian Eckert (L) and Finance minister Michel Sapin attend a press conference at the Ministry in Paris, April 23, 2014. (REUTERS/Philippe Wojazer)

PARIS: France outlined a slower road map Wednesday to reduce its chronic deficit to the European Union’s treaty limit next year, based on growth assumptions described by an independent watchdog as risky.

Europe’s second-biggest economy, with the highest public spending quota in the EU, is a serial laggard where recovery and public finances are concerned.

It has already been granted a two-year extension until 2015 on the original deadline to bring its public deficit below the ceiling of 3 percent of gross domestic product.

Its partners fear it may miss the deadline again next year, but an unpopular Socialist government is struggling to sell painful savings measures to the electorate and to rebellious rank and file lawmakers, even though they are milder than outright spending cuts in many other European countries.

President Francois Hollande came face-to-face with angry voters during a visit to the southern town of Carmaux after locals had draped a banner saying “No to austerity” over a statue of the founding father of French socialism, Jean Jaures.

“You haven’t kept your promises,” one woman told the president as he stopped in front of her house.

Some people jeered and whistled in disapproval.

In a speech, Hollande said he had “understood” voter frustrations but he argued that France had little choice but to curb spending, become more competitive and work with Europe.

The government raised its official forecasts for the deficit for this year and next by 0.2 points to 3.8 percent and 3.0 percent of GDP respectively.

That leaves no margin for error should growth fail to meet government projections – as most private economists expect.

“We know this is a demanding strategy, which requires courage from all, but it’s a strategy which is up to the scale of the challenge,” Finance Minister Michel Sapin told the parliamentary finance committee.

The plan also abandoned Hollande’s commitment to balancing the budget by the end of his term in 2017, envisaging a deficit 1.3 percent of GDP in that year.

Appointed after the Socialists were drubbed in March local elections, Prime Minister Manuel Valls promised in his first policy speech to give priority to kickstarting growth, fueling concern that Paris might demand more time to reach the target.

But after stern words from Brussels and Berlin, the government said it would stick to its commitments, unveiling a 50 billion euro ($69 billion) savings package that will freeze pensions and welfare benefits for a year, keep most civil service pay frozen until 2017 and clamp down on public spending.

Valls will send the package to the European Commission, which polices member states’ public finances, and seek a vote of support for it in parliament next Tuesday.

The EU executive is likely to decide on June 2, after next month’s European parliamentary elections, whether to extend an budget discipline procedure against France which began in 2009.

An EU source said sanctions could not be ruled out but the final decision would be political.

The government raised its growth forecasts to 1.0 percent in 2014, 1.7 percent in 2015 and 2.25 in 2016, versus 0.9 percent, 1.7 percent and 2.0 percent previously.

A Commission spokesman declined to comment on the forecasts.

However, the High Council of Public Finances, a watchdog made up of public auditors and independent economists, called into question the forecasts beyond this year.

It said the 2015 prediction was “not out of reach,” but added that “the macroeconomic scenario presented by the government contains several weaknesses and is subject to various risks,” relying on a rebound in consumer confidence and revenues from recently announced supply-side measures.

It called the 2016 and 2017 forecasts “optimistic” – a euphemism for unrealistic.

The 2014 and 2015 forecasts are well above those of a Reuters poll of economists last week which put growth at 0.8 percent this year and 1.2 percent next year, with France missing the deficit reduction target.

Economic data released on Wednesday did little to support government optimism.

The private sector expanded at a much slower rate in April, surveys showed, underlining the fragility of the recovery.

French governments of left and right have a track record of basing budget plans on rosy growth and revenue assumptions that lead to a higher deficit when growth falls short of expectations.

A new EU budget review procedure gives the Commission more power to challenge figures which its own economists deem unrealistic and send a national budget plan back for redrafting.

Diplomats said in advance of the plan that if it aimed for a 3 percent deficit next year, a lame-duck Commission in its last months in office would probably not want to clash with Paris.

In 2013, France missed its target of 4.1 percent and its deficit ended the year at 4.3 percent of GDP.

Some officials in Paris hoped that Italy’s new socialist Prime Minister, Matteo Renzi, would be an ally in bending the EU targets. But Renzi, whose country is already under the 3 percent deficit limit, has decided to play by the rules.

A version of this article appeared in the print edition of The Daily Star on April 24, 2014, on page 6.




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