PARIS (MNI) – France must take further measures to consolidate
public finances in order to lower its public deficit to 3% of GDP by
2013, the International Monetary Fund said Wednesday.
“France cannot risk missing its medium-term fiscal targets,” given
the need to protect its AAA credit rating and respect the EU’s Stability
Pact, the IMF said in its report on annual Article IV consultations.
Whereas the government aims to bring the deficit below 3% in 2013
and hit 2% in 2014, the Fund’s baseline projections see the shortfall at
3.8% in 2013 and 2.9% in 2014.
The government should thus prepare “contingency measures that would
secure the targeted consolidation in case growth and revenue outcomes
fall short” of assumptions, the IMF said. “With limited scope and
desirability for raising tax rates, further efforts will need to rely
mainly on limits on spending growth and a growth-oriented restructuring
of the tax system.”
While the IMF expects GDP growth this year to overshoot the
government’s standing projection of 2.0% by 0.1 point, it is less
optimist about the longer term, forecasting no acceleration through
2014.
The government is counting on GDP growth of 2.25% next year and
2.5% in 2013 and 2014 to help meet deficit targets. The IMF estimates
long-term potential growth at around 1.4%, rising to 1.6% in 2016 —
well below the government’s assumption of 2%.
“Risks to the outlook are tilted to the downside,” the Fund
cautioned, citing high public debt and the exposure of French banks to
the Eurozone periphery in the context of the sovereign debt crisis.
“A swing in investor sentiment could affect the availability and
cost of financing” for the government and banks, it warned. “Growth
spillovers to France from a shock in Spain and Italy during a period of
financial stress would be significant.”
Whereas the government expects the public debt ratio to peak at
86.9% of GDP next year, the IMF’s baseline projections see a peak of
88.1% in 2013.
“In a scenario where interest rates are permanently higher by
one-half standard deviation, debt would peak at almost 90% of GDP in
2013, and if both interest rates are higher and growth is lower, debt
would continue to rise to 95% of GDP by 2016,” it reckoned.
Among its fiscal policy recommendations, the IMF proposed a gradual
elimination of VAT exemptions and incentives, including reduced rates.
“An ambitious VAT reform could yield up to 3.3% of GDP and be
combined with the introduction of a carbon tax, higher revenue from
fuel, alcohol, and tobacco taxation, gradual hikes in recurrent
immovable property taxes, and improving the efficiency of the personal
income tax while further reducing personal income tax allowances to
lower the still high labor tax wedge at the average wage level,” it
said.
The Fund implicity backed the government’s aim of anchoring
balanced budget targets in the constitution. “With a second large core
country adopting a fiscal rule, the credibility of the euro area’s
Stability and Growth Pact would be significantly strengthened,” it
reasoned.
Parliament has already ratified a “golden rule” amendment that
would oblige each new government to set fiscal consolidation targets at
the start of its mandate. But the three-fifths majority required to
alter the constitution would require support of the opposition Socialist
Party, which is reluctant give President Sarkozy satisfaction ahead of
the presidential elections next spring.
The IMF sees inflation rising to an average of 2.1% this year —
above the government’s projection of 1.8% — then slowing to 1.7% next
year before creeping up to 1.9% by 2014. “Looking forward, headline
inflation risk is on the upside, while core inflation should remain
relatively moderate,” it said.
The Fund called for a “comprehensive strategy” to gear incentives
in the economy “towards work, investment in more productive activities,
and innovation,” estimating that this could boost growth by around 0.75
point per year over the medium term.
–Paris newsroom +331 42 71 55 40; e-mail: stephen@marketnews.com
[TOPICS: M$F$$$,M$X$$$,MT$$$$,MFX$$$,MGX$$$]
