French budget bets on growth amid record deficit

1st October 2009, Comments 0 comments

France took a bet on Wednesday that its tentative economic recovery will eventually gain momentum, as the government revealed a budget based on running record deficits until at least 2011.

According to figures released with the budget plan, France's public deficit will grow to a record 8.2% of GDP this year and 8.5% in 2010, with growth expected to rise to only an anaemic 0.75% next year.

Despite massive budget shortfalls, stimulus spending will continue as France battles to shake off the effects of the global crisis and businesses will be given more than EUR 13 billion (USD 19 billion) in tax cuts.

Deficit and debt levels will therefore not fall before 2011, and there is no prospect of returning them to the levels mandated by the eurozone stability pact until beyond 2012, the government said.

Under Maastricht treaty rules, eurozone member states are supposed to keep their deficits under three percent, but most are far above this as their public spending explodes and tax revenue falls during the crisis.

French public debt will soar to 84% of national output in 2010, up from 68% at the end of 2008 and well above the theoretical 60% limit set when Paris and its partners launched the single currency.

High deficits have been an intractable problem for years and were greatly aggravated by the recession.

"It's an aggravation that we have to accept," said Budget Minister Eric Woerth, arguing that two thirds of the shortfall was a "crisis deficit" due to the cost of recovery and collapse in tax revenues.

According to the budget, the French economy is expected to shrink this year by 2.25% before seeing renewed growth of 0.75% next year and 2.5% in 2011.

"That's an ambitious target, but not entirely unrealistic," said Herve Boulhol of the Organisation for Economic Cooperation and Development. "Maintaining such a rate of growth in the medium term? That's another story."

Presenting her plans to a parliamentary finance committee, Finance Minister Christine Lagarde described the proposal as a "recovery budget."

"It's imperative that we support growth, because it's the return of growth that will generate investment and jobs," she said.

France expects to lose 580,000 private and 34,000 public sector jobs this year, and the budget forecasts that another 190,000 could go next year.

The European Commission has forecast that unemployment in France will rise to 9.6% in 2009 and 10.7% in 2010.

Total taxation as a proportion of output will stay around the same next year at around 40.7% of GDP, but green measures and moves to encourage investment will shift some of the burden from business to individuals.

Companies will see an accelerated payment of EUR 2.5 billion in research tax credits and a local business tax will be partially abolished, saving the private sector around EUR 11.7 billion in 2010.

Private citizens, however, will not be so lucky. Retirement bonuses will henceforth become taxable income, and several household tax credits will be modified on environmental grounds to make them less generous.

Both business and families will also have to pay a new carbon tax designed to encourage investments in green technology and penalise greenhouse gas emissions, although the household proportion will be redistributed.

The carbon tax should be worth EUR 1.5 billion in new state revenue in 2010.

France's opposition Socialists condemned what they said was an attempt by Sarkozy's right-wing administration to shift the burden of paying for the recovery from businesses to working families and local government.

"Investing more for the future is necessary, but is totally incompatible with continuing to lower general taxation for businesses and the rich," complained Didier Migaud, chairman of the parliamentary finance commission.

The budget bill will go before parliament next month.


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