French Budget, Growth Targets Seem Overly Optimistic

France is counting on unspecified budget cuts and high economic growth forecasts to balance its budget.

French president François Hollande welcomes NATO secretary general Anders Fogh Rasmussen at the Elysée Palace in Paris, April 8
French president François Hollande welcomes NATO secretary general Anders Fogh Rasmussen at the Elysée Palace in Paris, April 8 (NATO)

France announced €50 billion in savings on Wednesday as part of a budget that is supposed to significantly reduce the share of government spending in continental Europe’s second largest economy. But its performance in recent years, coupled with optimistic growth forecasts, cast doubt upon its ability to meet these targets.

Under the latest plan, France would bring its deficit below the European ceiling of 3 percent of gross domestic product by 2015 — up from 2.8 percent in its previous plans.

The country missed its 4.1 percent deficit target last year, ending 2013 with a 4.3 percent shortfall instead. This year, it is aiming for a 3.8 percent deficit, having been granted a two-year extension by the European Commission to bring its borrowing in line with its treaty obligations.

By 2017, the government says spending will account for 53.3 percent of GDP, down from 57.1 percent last year. But details on how it will achieve this target are lacking.

Between 2015 and 2017, the central government would reduce spending by €18 billion, plus €21 billion in savings from health and social security, while expecting local governments to contribute €11 billion. Specific measures include a freeze in public-sector salaries and certain benefits — some of which will also go toward financing a €30 billion cut in payroll taxes that is part of President François Hollande’s “responsibility pact” with businesses. In exchange for lower taxes, he expects companies to create more jobs.

Hollande is also counting on higher growth to reduce public spending relative to economic output but his government’s own financial watchdog, the High Council for Public Finances, warned on Wednesday that its forecasts of 1.7 percent growth in 2015 and 2.25 percent through 2017 may be optimistic.

After his election in 2012, Hollande started off by raising taxes which not only failed to significantly reduce borrowing but also restrained economic expansion.

Previous spending cuts, announced as “unprecedented” when they were worth €15 billion, did not prevent the national debt from rising to €1.9 trillion last year, or 93 percent of GDP. It is expected to top €2 trillion this year.

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