France's Hollande stakes credibility on 2013 budget

Reuters News
Posted: Sep 27, 2012 7:09 PM
France's Hollande stakes credibility on 2013 budget

By Leigh Thomas

PARIS (Reuters) - President Francois Hollande puts his fiscal credibility on the line on Friday when he delivers France's toughest budget in 30 years in the face of a stagnant economy, record unemployment and plunging poll ratings.

The Socialist leader's first budget, to be presented to the cabinet at a mid-morning meeting, needs to make 30 billion euros ($39 billion) in savings to keep deficit-cutting pledges on track and not fall foul of financial markets.

The belt-tightening, via tax rises for high earners and a freeze on spending, aims to slash the 2013 public deficit to 3 percent of economic output and ensure France's place beside Germany as a core euro zone power and trusted borrower.

"This budget is about struggle, about reconstruction," Prime Minister Jean-Marc Ayrault said on France 2 television. "If we abandon the (3 percent) target, our interest rates will rise immediately."

Economists, however, are concerned the budget goals look ambitious, especially based on a 2013 economic growth forecast of 0.8 percent that is widely seen as over-optimistic.

Ayrault repeated a pledge to cut unemployment within a year and defended the government's 0.8 percent growth target as "realistic and within reach".

The risk of below-target growth raises the chances that Hollande, whose approval ratings have slid as low as 43 percent just four months into his term, may have to make more savings to keep his deficit goals in reach.

Friday's budget bill is expected to lay out 10 billion euros in expected new revenues from extra taxes on mainly well-off households and another 10 billion from either corporate tax rises or cuts to existing tax breaks.

A further 10 billion will come from keeping a lid on central government spending, continuing a policy of replacing only one in two retiring civil servants and postponing spending. Calls from some economists for broader cuts will be ignored.

Hollande's promise to cut the deficit to 3 percent of gross domestic product from 4.5 percent this year is a step towards his pledge to balance the budget in 2017.

BNP Paribas economist Helene Baudchon said the target was optimistic and the deficit was likely to come in above 3.0 percent given the weak growth outlook for next year. "As things stand, achieving a deficit of 3.3 percent would in itself be a remarkable outcome," she said.

Any sign of wavering could not only prompt financial markets to rethink their attitude towards France, in terms of low bond yields, but also trigger further downgrades after Standard & Poor's stripped France of its triple-A rating this year.

At the same time, the state belt-tightening risks putting further pressure on an economy which has stagnated over the last three quarters to teeter on the brink of recession, while the unemployment rate has risen to a 13-year high above 10 percent.

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"It's a big risk, because it's possible that, as they try to reduce government spending and return to a balanced budget, they have a negative impact on growth," said Christopher Bickerton, an associate professor at Paris' Sciences Po university.

He said Hollande was betting that the short-term pain of a tough 2013 budget would sow the seeds for growth in the medium term by maintaining the confidence of the financial markets.

"If growth falls, deficits increase, and they won't be able to balance the budget," he said. "So it's clearly a risk that he is taking, but that's the calculation."

Tax increases on companies could hardly come at a worse time, with corporate profit margins at their lowest since the mid 1980s and firms cutting staff in the face of falling demand.

($1 = 0.7775 euros)

(Reporting by Leigh Thomas; Editing by Catherine Bremer and Giles Elgood)