Economists sceptical of French budget promises

3rd October 2005, Comments 0 comments

PARIS, Oct 2 (AFP) - France's budget deficit, already on track to exceed three percent of output this year, will widen even further in 2006, despite a series of budget promises aimed at reining in spending, economists say.

PARIS, Oct 2 (AFP) - France's budget deficit, already on track to exceed three percent of output this year, will widen even further in 2006, despite a series of budget promises aimed at reining in spending, economists say.

If, as widely expected, the public deficit overshoots the government's target of three percent of gross domestic product in 2005, it would mark the fourth straight year that France had failed to respect the eurozone's Stability and Growth Pact.

Overall debt, for its part, would remain well above the pact's threshold of 60 percent of GDP both this year and next, a breach that was openly acknowledged by the government in its 2006 budget presentation on Wednesday.

In effect, the budget has been built on spending and growth forecasts, including economic growth of 2.25 percent next year, which few economists consider attainable.

"The growth forecast is a risky bet," said Emmanuel Ferry, chief economist at Exane BNP Paribas. He added that the government's goal of keeping the debt-to-GDP ratio limited at 66 percent is "totally unrealistic".

Ferry sees this ratio reaching 70 percent next year.

At Sociéte Générale, economist Olivier Gasnier said: "The (official) forecast is all the more optimistic, given the government's fairly unfavourable oil price estimate of US $60 per barrel. We see no signs of a spontaneous improvement in the labour market."

This would put France on track for another confrontation with the EU Commission, which in theory could impose fines until Paris brings its finances back into line with the stability pact commitments.

But economists said that concerns about sustaining European growth would keep the commission from proposing sanctions, and France would likely get away with just a slap on the wrist, as it did in 2003, when deficits in both France and Germany exceeded the three percent limit for the first time since the launch of the euro.

"We rather expect the deficit to reach 3.2 percent (of GDP) this year and rise to 3.3 percent in 2006. Enough to raise eyebrows in Brussels, but not enough to warrant an excessive deficit procedure," said Eric Chaney, economist at Morgan Stanley.

Even if oil prices ease from current highs, dealers say the negative impact from this year's surge in energy costs will be a handicap for the economy for several quarters to come, and thus discourage the EU Commission from taking action.

The International Monetary Fund anticipates French growth of 1.8 percent next year, while some economists paint an even darker picture; Laure Maillard at Ixis predicts growth as low as 1.2 percent, while Ferry at Exane expects just 1.0 percent growth.

"All in all, we do not share the over-optimism regarding growth expectations for next year," said JP Morgan economist Maryse Pogodzinski, who said the government "risks some significant fiscal slippage, leaving its public deficit above three percent of GDP once again in 2006."

But Pogodzinski believes it is "fair enough to recognise the increased efforts from the French government to keep a tight control on overall spending despite an unfavorable social climate."

For the third year in a row, France has pledged to keep central government spending stable in real terms, and it has announced a series of measures aimed at bringing down Sécurité Sociale spending, one of the main sources of the country's projected deficit in 2006.

Copyright AFP

Subject: French news

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