France’s Hollande stakes credibility on 2013 budget

by on September 27, 2012 11:05 pm BST

Thu Sep 27, 2012 7:05pm EDT

* Government seeking about 30 billion euros in savings

* Economists see govt growth forecast as too optimistic

By Leigh Thomas

PARIS, Sept 28 (Reuters) – President Francois Hollande puts
his fiscal credibility on the line on Friday when he delivers
France’s toughest budget in 30 years in the face of a stagnant
economy, record unemployment and plunging poll ratings.

The Socialist leader’s first budget, to be presented to the
cabinet at a mid-morning meeting, needs to make 30 billion euros
($39 billion) in savings to keep deficit-cutting pledges on
track and not fall foul of financial markets.

The belt-tightening, via tax rises for high earners and a
freeze on spending, aims to slash the 2013 public deficit to 3
percent of economic output and ensure France’s place beside
Germany as a core euro zone power and trusted borrower.

“This budget is about struggle, about reconstruction,” Prime
Minister Jean-Marc Ayrault said on France 2 television. “If we
abandon the (3 percent) target, our interest rates will rise

Economists, however, are concerned the budget goals look
ambitious, especially based on a 2013 economic growth forecast
of 0.8 percent that is widely seen as over-optimistic.

Ayrault repeated a pledge to cut unemployment within a year
and defended the government’s 0.8 percent growth target as
“realistic and within reach”.

The risk of below-target growth raises the chances that
Hollande, whose approval ratings have slid as low as 43 percent
just four months into his term, may have to make more savings to
keep his deficit goals in reach.

Friday’s budget bill is expected to lay out 10 billion euros
in expected new revenues from extra taxes on mainly well-off
households and another 10 billion from either corporate tax
rises or cuts to existing tax breaks.

A further 10 billion will come from keeping a lid on central
government spending, continuing a policy of replacing only one
in two retiring civil servants and postponing spending. Calls
from some economists for broader cuts will be ignored.

Hollande’s promise to cut the deficit to 3 percent of gross
domestic product from 4.5 percent this year is a step towards
his pledge to balance the budget in 2017.

BNP Paribas economist Helene Baudchon said the target was
optimistic and the deficit was likely to come in above 3.0
percent given the weak growth outlook for next year. “As things
stand, achieving a deficit of 3.3 percent would in itself be a
remarkable outcome,” she said.

Any sign of wavering could not only prompt financial markets
to rethink their attitude towards France, in terms of low bond
yields, but also trigger further downgrades after Standard &
Poor’s stripped France of its triple-A rating this year.

At the same time, the state belt-tightening risks putting
further pressure on an economy which has stagnated over the last
three quarters to teeter on the brink of recession, while the
unemployment rate has risen to a 13-year high above 10 percent.

“It’s a big risk, because it’s possible that, as they try to
reduce government spending and return to a balanced budget, they
have a negative impact on growth,” said Christopher Bickerton,
an associate professor at Paris’ Sciences Po university.

He said Hollande was betting that the short-term pain of a
tough 2013 budget would sow the seeds for growth in the medium
term by maintaining the confidence of the financial markets.

“If growth falls, deficits increase, and they won’t be able
to balance the budget,” he said. “So it’s clearly a risk that he
is taking, but that’s the calculation.”

Tax increases on companies could hardly come at a worse
time, with corporate profit margins at their lowest since the
mid 1980s and firms cutting staff in the face of falling demand.