PARIS (MNI) – France’s valiant efforts to slash the chronic budget
overrun of its health care system suffer from the same credibility
deficit as its strategy to whittle down the overall public deficit,
namely that its economic growth scenario looks too rosy.

For the 2012 social security budget unveiled Thursday, the
government assumes that GDP growth will remain steady at 1.75%. While
the forecast was revised down last month by half a point, it still tops
those of virtually all independent analysts, most of whom expect a
slowdown to 1.2% or less next year. This week, the IMF cuts its forecast
to 1.4% and said risks were to the downside.

The social security budget foresees a reduction in the deficit from
a record high of E23.9 billion last year to E18.2 billion this year and
E13.9 billion next year.

Total employee incomes, on which the bulk of social security
revenues are based in the form of payroll taxes, are expected to grow at
a steady pace of 3.7%. Even if employment fluctuates less than overall
output and wages may rise somewhat faster next year, there is still a
risk that new hiring may slow and revenues undershoot projections.

The labor market has recovered faster than expected from the
recession, boosting total incomes by a projected 3.7% this year compared
to an initial forecast of +2.9%. This brought E1.6 billion more in
revenues than expected. Whether the trend can be held next year remains
to be seen.

The looming cyclical downturn would also undermine investment
revenues, the second main source of social security revenues. On the
other hand, the hike of dissuasive taxes on “risky” goods like alcohol
and tobacco could net more, if the economic slump drives drinkers and
smokers to dispair.

To be on the safe side, the health care budget has a built-in
cushion of over half a billion euros, and officials can tighten the
screws during the course of the year if spending looks headed out of
control.

Thanks to reforms in recent years, the government has successfully
dampened the annual rise in health spending from nearly 3% last year to
2.9% this year and aims for 2.8% in 2012, which implies cost-cutting of
E2.2 billion. The deficit in the health care branch is targeted at E5.9
billion, down by half since last year.

Another cushion is the forecast for inflation of 1.7% next year,
which now looks on the high side. The IMF expects 1.4% at most. Since
some social benefits are indexed to consumer price trends, a slowdown in
inflation along with economic growth could bring additional budget
leeway.

On the revenue side, the government has earmarked half the E12
billion in austerity measures announced last month for the social
security system. Besides the higher “sin” taxes, it will cream off a
larger share of investment earnings and tighten a number of tax
loopholes for a net take of E4 billion.

Last year’s controversial pension reform is also beginning to
produce results, as the shortfall in the retirement branch, which is on
top of the social security deficit, is expected to decline slightly to
E3.7 billion. The government estimates the impact of the reform at E5.5
billion next year.

Reducing the social security shortfall should help France come
closer to its overall deficit target for next year of 4.5% of GDP —
still higher than most of its Eurozone neighbors. The government aims to
eliminate the health care deficit by 2015 and bring the pension system
into balance by 2018.

–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com

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