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Categorized | Economy

French winner faces tough budget action

Posted on April 30, 2012

Francois Hollande

Francois Hollande

While François Hollande, the French socialist presidential hopeful, has gained much attention with his calls for Europe to favour growth over austerity, the priority for whoever wins the election on Sunday is to balance the budget – a feat not accomplished in France for more than three decades.

President Nicolas Sarkozy, frustrated by what he clearly sees as Mr Hollande’s grandstanding on his call for a European growth pact, puts it bluntly. “The only way for France to recover control over its destiny is to repay its debts,” he reiterated at the weekend.

    With public debt at more than 89 per cent of gross domestic product and still rising, and unforgiving financial markets looking on, Sunday’s winner will not be able to avoid tough action to meet the target accepted by both candidates of reducing the budget deficit to 3 per cent of GDP next year.

    In Mr Hollande’s case – should he win – that could mean some difficult decisions on promises he has made to hire 60,000 teachers, 5,000 police officers and expand youth employment by 150,000 “jobs of the future”.

    “I don’t think he will be able to implement half of what he says,” says Guillaume Menuet, economist at Citigroup Global Markets. “Like the Labour government in the UK in 1997, he will have to prove his fiscal credentials – especially to Germany if he is going to persuade Berlin to join the growth pact bandwagon.”

    Mr Hollande has repeatedly stressed that he will do whatever it takes to hit next year’s deficit goal – and reach his additional target of eliminating the deficit in 2017, a year later than planned by Mr Sarkozy.

    He says he will commission the Cour des Comptes, the national audit office where he once worked, to prepare a report by the end of June on the state of the public finances. “If we are in a more difficult situation [than expected], I will take the necessary action,” he said last week.

    In its annual report in February, the Cour des Comptes said the country required a bigger effort, especially to cut public spending, which accounts for a whopping 56 per cent of GDP in France, despite rigorous savings programmes already put in place by Mr Sarkozy.

    The pressure may not be immediate: the budget deficit in 2011 was 5.2 per cent, well below the 5.7 per cent target and this year’s figure of 4.4 per cent looks within reach. But with growth sluggish at best, hitting 3 per cent in 2013 is likely to require additional savings.

    “Next year is the big one,” says Mr Menuet. “It will be impossible for the big eurozone countries not to hit the 3 per cent target. I don’t think they could get away with it.”

    Both Mr Sarkozy and Mr Hollande have based their 2013 plans on 1.7 per cent growth projections, regarded by independent economists as over-optimistic.

    Even if growth holds up to the levels estimated by the two candidates, there are still question marks over their budget plans.

    Mr Sarkozy’s government has set out total savings of €115bn to balance the budget by 2016, made up of €75bn in spending cuts and €40bn in increased taxes. But the Montaigne institute, a think-tank that has done its own reckoning of the candidates’ proposals, says the president has overestimated his planned savings plan by 20 per cent.

    Mr Hollande’s plans are for savings of €100bn over the period, split roughly 50-50 between tax increases (including targeting high earners, big companies and banks) and spending cuts. But his growth forecasts for the years beyond 2014 are marginally more optimistic than Mr Sarkozy’s and he has supplied no detail on where cuts will fall beyond saying spending will not grow by more than a nominal 1 per cent a year.

    Both Mr Sarkozy and Mr Hollande have been coy about the stringent conditions ahead during the election campaign, avoiding using the terms “austerity” or “rigour”. “In French they have bad connotations,” says Michel Sapin, Mr Hollande’s policy chief. But whatever it is called, French voters are set for more of it in the coming months, regardless of who they choose on Sunday.