Charlemagne | French public finances

Squaring the circle

To some surprise, France has promised to stick to its deficit cutting target

By S.P. | PARIS

WHEN President François Hollande was elected in 2012 he vowed to shift Europe away from austerity and towards a more growth-friendly policy. And late last month, when he was appointed prime minister, Manuel Valls strongly hinted that he did not intend to keep to France’s pledge to curb the government’s budget deficit to below 3% by 2015. The deficit would indeed be reduced, he declared, but at a “rhythm” that did not cramp economic growth. It looked like a victory for the anti-austerity wing of Mr Hollande’s Socialist government.

On April 23rd, however, when the government unveiled its 2014-2017 spending plans, which it must submit to the European Commission, the tune changed. France pencilled in a deficit target for 2015 of exactly 3%, up from 2.8% in its previous plans, and 3.8% in 2014 rather than 3.6%. So, on paper at least, France will stick to its promises after all.

Michel Sapin, the finance minister, told Le Monde that he had never asked for extra time. “France is not a country that asks for delays,” he insisted, conveniently disregarding the fact that his predecessor, Pierre Moscovici, had already requested (and got) a delay on Mr Hollande’s behalf in 2013. Reports suggested, however, that exploratory talks by top French officials to postpone the 3% target again had met with stiff resistance in Brussels. France had been given extra time once; this time, the second-biggest economy in the euro zone had to keep its promises.

How has the French government made the sums add up? The short answer is a mix of fairly ambitious budget savings and improved growth forecasts. On the first point, Mr Valls has begun to spell out how the €50 billion ($69 billion) of budget savings he has promised for 2015-2017 will be shared: €18 billion will come from central government, €21 billion from health and social security, and €11 billion from local government.

Specific measures include a continuation of the freeze on public-sector pay, and on certain entitlements such as pensions and family benefits, for a year. Some of these savings will go towards financing €30 billion of cuts in payroll charges paid by companies, as part of a “responsibility pact” designed to encourage private-sector job creation, as well as a reduction in social charges for low earners.

In terms of ongoing fiscal consolidation, France is indeed making an effort. After squeezing the French with tax increases for the past two years, Mr Hollande’s government is finally beginning to concentrate on curbing public spending. By 2017, it says that public spending should account for 53.5% of GDP, down from 57.1% in 2013. Yet the stability programme remains vague on how some of these savings will be achieved, referring to familiar fall backs such as efficiency gains and rationalisation of state-owned agencies, which are easier to announce than to put in place.

The French plans also lean on growth forecasts that even its own public-finance watchdog, the High Council on Public Finances, has queried. In a statement issued on April 23rd, the council validated the government’s revised forecast for 2014 of 1%, up from 0.9%. But it called its forecast of 1.7% for 2015 uncertain, and that of 2.25% for 2016-2017 “optimistic”.

The stability programme now goes to a “consultative” vote in parliament on April 29th. Already, there has been much grumbling on the Socialist Party’s left wing about the freeze on public-sector pay and pension benefits, and a group of deputies has called Mr Valls’s plans “economically dangerous”. The stability programme shows that the prime minister has so far resisted such pressure. But he has no political parliamentary base, and is distrusted by many on the party’s left wing as too much of a centrist. The real challenge for Mr Valls will be to convert his business-friendly plans into concrete decisions, without losing his restless Socialist deputies.

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