France unveils toughest budget in 50 years

29th September 2010, Comments 0 comments

France took a radically new line on its public finances Wednesday, unveiling the toughest spending cuts in 50 years to bolster its position as a key player in the eurozone and balance its books.

President Nicolas Sarkozy's government announced a budget that imposes unprecedented cuts to curb soaring overspending and saves billions by closing tax loopholes, with the economy predicted to grow by 1.5 percent this year.

The measures are aimed at reining in a public deficit that is predicted to hit a record 7.7 percent of gross domestic product in 2010, far above the 3.0-percent limit laid down by European Union rules.

And the central government's budget deficit will hit 152 billion euros (207 billion dollars), falling to 92 billion euros in 2011.

The overall public deficit reflects spending by the central government, local authorities and social welfare bodies.

It is subject to EU regulations and is closely watched by money markets and by France's partners in the European Union and the 16-nation eurozone.

Finance Minister Christine Lagarde will increase revenue by closing tax loopholes worth 9.4 billion euros and has vowed to cut spending by allowing 31,638 government employees to retire without being replaced.

Some of the extra cash will come from de-facto tax increases on previously favoured categories of worker and on some insurance and property investments.

Over one billion euros will come from raising VAT on domestic Internet, television and telephone connections.

Despite criticism from the Socialist opposition, the government insists the budget is not an austerity measure, arguing that France's predicament is different from that of such troubled European economies as Greece and Spain.

"We want to break with a tradition that makes our country the European champion of public spending," Budget Minister Francois Baroin told Le Monde daily.

"In this sense the budget is historic. Never in the last 50 years have we seen a two-percent reduction in the public deficit in a year. The effort will continue until public finance is balanced."

Paris has promised the European Commission and fellow EU members that the overall public deficit will be reduced to six percent next year, cut down to the three percent limit by 2013 and then to two percent in 2014.

Such a reduction so quickly is widely regarded as a huge undertaking, and a correction on this scale has never been achieved in modern French history. If the massive strikes and street protests that greeted Sarkozy's pension reforms plan are a guide, it will face stiff opposition.

And while France seeks to reduce its overall deficit, its annual debt is set to remain high until at least 2012.

Next year's interest payments on debt will approach the cost of the entire education budget, the biggest item in the central government budget. By 2012, interest payments will overtake education.

In France, the social security budgets are separate from, and bigger than, the central government budget.

From 2011, EU nations' budgets must first be submitted to the European Commission before going to their national parliaments, with Brussels on Wednesday suggested fining lax eurozone nations.

The Commission wants to punish countries that fail quickly enough to reduce their debt to below 60 percent of GDP. France's debt is predicted to peak in 2012 at 87.4 percent.

The high deficits being run by European governments have undermined the stability of the eurozone single currency bloc and driven up the cost of some government borrowing on international bond markets.

France's deficit-cutting measures will be compared to those of partners and competitors, most importantly Germany, which is expecting economic growth of two to three percent this year despite making tough cuts of its own.

On Wednesday, the yield or interest rate on 10-year French government bonds, representing how much a government pays to finance debt, was 2.619 percent compared with 2.235 percent for Germany. Both these eurozone benchmark figures were rising, but the spread or difference between them was steady.

Socialist leader Martine Aubry said the budget was "a real austerity plan" that would affect "mainly the middle class and not those who really have money."

She told Canal+ television that although the budget should reduce the deficit and stimulate growth, it would in fact raise taxes "and reduce spending that was necessary for maintaining growth."

© 2010 AFP

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