–Adds Details From Budget Bill, Comments By Ministers

PARIS (MNI) – The French government aims to cut its deficit by E60
billion next year to E92 billion in order to reduce the overall public
deficit from 7.7% of GDP to 6.0%.

The multi-year budget program accompanying the bill presented in
Cabinet on Wednesday confirms the downward trajectory in the deficit to
4.6% in 2012 and 3.0% in 2013. The target for 2014 has been set at 2.0%
of GDP.

GDP growth is expected to accelerate from 1.5% or more this year to
2% next year and to 2.5% through 2014.

While the growth assumptions, especially from 2012 onward, appear
optimistic to most observers, Finance Minister Christine Lagarde said
she was “relatively confident” about next year’s GDP forecast. Whatever
the outcome, “we will do what is needed to reach the deficit of 6%,” she
pledged. “The deficit is not the adjustment variable.”

Budget Minister Francois Baroin reiterated that the 6% deficit
target is “untouchable” and promised that any surplus revenues would be
allocated to a faster reduction in the shortfall. “Our goal is to
approach a balanced budget.”

This represents a fundamental shift in French fiscal policy, which
had previously set relatively fixed spending targets and allowed the
deficit to fluctuate according to the pace of economic activity and the
resulting public revenues.

The bill embodies “a new budget discipline ‘a la francaise’,”
combining fiscal consolidation with attention to social protection,
Baroin said.

For Lagarde, “it is essential to reduce the deficit.” She noted
that investors have become “extremely attentive about the consolidation
of public finances” in France. The goal is to hold the spread of 10-year
bond rates to the German Bund at the lower end of the recent range of
30-55 basis points, she added.

Indeed, next year’s deficit target was calibrated to assure that
government borrowing on the market would decline, according to a
ministry source cited by the daily Le Figaro.

Moreover, the enforcement of the EU’s Stability Pact, which sets a
ceiling for annual public deficits at 3% of GDP, will be stiffened,
Lagarde noted. At the same time, she warned against the mechanical
application of financial sanctions against deficit offenders that
Germany favors, arguing that government leaders should have the final
say.

The European Commission today proposed a new system in which
countries that break the EU fiscal rules and are placed in an “excessive
deficit procedure,” would be required to deposit funds equal to 0.2% of
the their GDP with the Commission. The interest on that money would be
distributed to the “good” EMU states not in violation of the fiscal
rules. If the rule-breaking countries failed to fix the problem, their
deposits would not be returned.

These new proposed sanctions are semi-automatic, meaning they would
be imposed automatically but could be lifted by a qualified majority
vote. That contrasts with the current system in which fines must be
voted on before they can be imposed.

France’s unprecedented fiscal consolidation will not stop its
public debt from rising from 82.9% of GDP this year to 86.2% next year
and to 87.4% in 2012. The debt ratio is seen declining to 86.8% in 2013
and to 85.3% in 2014.

Experience suggests that a debt ratio above 80% is “clearly a brake
on growth,” Lagarde said.

While next year’s deficit cut is the largest on record and the
steepest of reductions to come, it will be in some ways the least
painful.

First, the E35 billion borrowed this spring for long-term research
and investment will mechanically disappear from next year’s budget. (As
the sum is not included in the Maastricht deficit ratio, the decline in
the public deficit amounts to some E40 billion.)

The same is true of E16 billion in stimulus measures this year to
kick-start the recovery after the recession.

Operational outlays and subsidies will be trimmed by 5%, except for
pension payments and debt service charges. Total government spending
will dip by 0.2%. In the following years, outlays are to be frozen in
nominal terms, again excluding pensions and debt charges.

Including social security outlays, total public spending is seen
rising by an average of 0.6% per year in real terms from 2011 through
2014.

With public spending at nearly 56% of GDP next year there is still
“leeway” for further reductions in the years ahead, Baroin said.

In order to roll back the state, the government will pursue its
policy of replacing only half of the civil servants who retire each
year. Some 100,000 positions have been cut since 2007 and 97,000 are on
the chopping block through 2013, with a reduction of over 31,600 next
year.

To reach the deficit target there will be a E10 billion increase in
tax revenues through a reduction in tax write-offs and fiscal incentives
for a wide range of economic and social objectives. As a result, the
total tax burden will rise from 41.9% of GDP to 42.9%. Business will
bear 60% of the increase and households the rest, the government
estimates.

The budget assumes an inflation rate of 1.5% next year, rising to
1.75% the following years.

–Paris newsroom +331 4271 5540; Email: stephen@marketnews.com

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