By Stephen Sandelius
PARIS (MNI) – France will be in the spotlight next year when
President Nicolas Sarkozy assumes the presidency of the G20, and its
fiscal policy will be under close scrutiny.
“What is important is to demonstrate to all markets, market
players, rating agencies — everyone who evaluates the sustainability of
French public finances — that we have the means and a credible plan to
return to balance and to reduce debt to levels that are much more
normal,” Bank of France Governor Christian Noyer underscored Thursday.
“Either we are able to make the fundamental reforms which prove how
public finances will be restored to balance — in this regard I think
pension reform is a good example — or we don’t have these means and
then we will be obliged to have austerity policies,” Noyer warned. “But
that is not the case today.”
Today, few observers believe France’s commitment to reduce the
public deficit by over two points next year to 6.0% of GDP can be held.
Even assuming a rebound in growth to 2.0%, the OECD sees the deficit at
6.9%.
“A stronger fiscal framework is needed to rebuild credibility and
ensure that fiscal policy is counter-cyclical, especially, in good
times,” the OECD said this week. “The forthcoming pension reform will be
seen as an acid test of the government’s capacity to restore fiscal
sustainability.”
Some fear that massive fiscal tightening will throttle the
still-fragile economic recovery. That is the Keynesian analysis of the
left-leaning OFCE economic think tank:
Slashing the deficit to 3% by 2013 would “amputate 1.4 percentage
points of growth per year,” estimates OFCE economist Eric Heyer. “The
bit of growth remaining — around 0.5% — would allow little deficit
reduction,” he added.
“France has never reduced its deficit by more than 0.6 point per
year and now it’s a question of 1.7 points per year for three years,”
Heyer reminded. “If it’s not a bluff on the government’s part, we’re
heading for a catastrophe.”
Whereas the OECD expects relatively little drag from fiscal
tightening, Patrick Artus, head of the prolific economic research team
at Natixis, estimates that more than four points of growth would be lost
over the next two years if France were to slash its deficit as planned,
giving an average annual GDP contraction of 0.8%.
Instead, Artus expects GDP growth of 1.1% in 2011 and 1.5% in 2012,
assuming that the deficit is trimmed to 7.5% next year and 6.5% the
following year — “with the risk of a negative reaction by financial
markets.”
At the other end of the analytical spectrum, Laurence Boone of
Barclays Capital believes that with a pickup in growth to 1.9% next
year, a “mild” fiscal adjustment equivalent to 0.6 point of GDP should
be enough to bring the deficit down to 6.5%.
“It has nothing to do with a massive tightening effort whatsoever,”
she insisted.
Ideally, the return to budget balance would be “spread over a
longer period than is planned,” she said. But “given their track record,
they have to show that they can actually implement the stability program
they have announced.”
The weaker euro, very low interest rates and robust foreign demand,
particularly from Asia, will bolster growth and tax revenues next year,
while the unwinding of stimulus measures introduced during the recession
should do the rest, Boone argued.
However, “if the sovereign debt crisis continues, this will weigh
on confidence, and the government will probably have to implement more
tightening than the quite mild measures they have so far,” she conceded.
They need not hike taxes, but rather widen the “quite narrow” tax base
for income and corporate taxes by reducing exemptions.
At BNP Paribas, economist Dominique Barbet has also forecast a
deficit of 6.5% next year, with a growth projection of 2.0%. The new
political and financial market environment is now dictating the fiscal
timetable: “The government doesn’t have much choice, it must control
public finances,” he explained.
“I think the government has gotten the message,” Barbet added.
Still, the fiscal measures announced so far are “relatively modest” at
around 0.3 point of GDP. “The economic impact should be relatively
small.”
The main risk next year is the social security budget, where
another deficit of E30 billion is expected, Barbet noted. Certain
outlays, for example for sick leave and work accidents, are bound to
increase once hiring resumes. In addition, there is likely to be some
catch-up effect for medical care that patients delayed during the
crisis, he reasoned.
“In my view, it will be hard to control health spending,” the
economist said. “For 2011, it’s clear there will be an overrun rather
than an underrun.” This is why a 6.0% deficit appears unrealistic, he
explained. “The government will have to adopt more radical measures.”
Barbet believes more tightening may be in store once the pension
reform has been boxed through. “If the government takes a few more, not
too radical measures, the return to 6.5% will be fairly easy,” he said.
“For the moment, I’m waiting to see what measures will be adopted.”
Is the government counting on downward rounding to meet its deficit
target? “I’m not sure the markets would accept that,” Barbet countered.
“Perhaps the market will demand that the commitment be respected down to
the decimal point.”
Subsequent deficit reduction will be more painful, he warned. The
unwinding of stimulus spending and low debt service charges will make
2011 “the easiest year to reduce the deficit.”
With the presidential and parliamentary elections in 2012, the
government may be wary of tightening the screws too much. “If fiscal
policy is moderately restrictive — relatively close to neutral — the
deficit won’t decline by 1.6 points,” Barbet predicted.
For the moment, BNP Paribas has penciled in a deficit of 5.5% for
2012 — nearly a full point higher that the government’s target. The
bank’s updated forecasts will come out next month.
–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com
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