French budget makes 'historic' attack on overspending

29th September 2010, Comments 0 comments

President Nicolas Sarkozy's government launched a "historic" attack on France's soaring overspending on Wednesday, unveiling a budget which closes tax loopholes and imposes unprecedented spending cuts.

The French economy will grow by 1.5 percent this year, two percent in 2011 and 2.5 percent a year from 2012 to 2014, with inflation set to be a moderate 1.5 percent in 2010 and 2011, the budget said.

The public deficit will hit a record 7.7 percent of gross domestic product this year, far above the 3.0-percent limit laid down by EU rules, on the basis of projections in the budget.

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 covers the central government budget, the one in focus in the statement on Wednesday, and also local authority budgets and welfare budgets. It is subject to key European Union rules and is closely watched by money markets and by France's EU partners.

Finance Minister Christine Lagarde aims to increase revenue by closing tax loopholes worth 9.4 billion euros, and to cut spending by allowing 31,638 government employees to retire without replacing them.

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

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 2.629 percent compared with 2.254 percent for Germany. Both these eurozone benchmark figures were rising, but the spread or difference between them was steady.

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

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

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 which greeted Sarkozy's pension reforms plan are a guide, it will face stiff opposition.

Despite criticism from the Socialist opposition, the government insists the budget is not an austerity measure, saying 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 public deficit in a year. The effort will continue until public finance is balanced."

Socialist leader Martine Aubry said the budget was "a real austerity plan" which 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."

State spending aside from that used to prop up the pension fund and service government debt will be frozen at current levels, as will transfers to local and regional governments.

© 2010 AFP

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