February 11, 2014 12:33 pm

France risks ‘serious blow’ to financial credibility

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The French national flag is seen flying from the roof of the Paris Nord train station in Paris, France©Bloomberg

France is in danger of missing its deficit reduction targets, risking a “serious blow” to the country’s financial credibility, the national auditor has warned.

In a sobering counter to President François Hollande’s latest pledge to cut France’s big public spending and tax bill, the Cour des Comptes called on the Socialist government to make a bigger effort to reverse the rise in public debt, set to top 95 per cent of national income this year.

“Any further delay in the consolidation of the public finances will translate into a worrying divergence with our European neighbours, a large amount of new debt and would be a serious blow to the financial credibility of France,” said Didier Migaud, the body’s president.

He said France’s debt level was in the “danger zone”, adding that a 1 percentage point rise in interest rates would add €2bn a year to an annual interest charge already running at €52bn.

Presenting the Cour’s annual report on Tuesday, Mr Migaud acknowledged that “considerable efforts” had been made to reduce the budget deficit, but mostly through tax increases – and no more than that achieved in a number of other European countries.

He said there was a “significant risk” that the revised 2013 target of 4.1 per cent of gross domestic product had been missed and this year’s 3.6 per cent objective was “not at this point guaranteed”, mainly due to lower than forecast tax receipts.

Missing these targets would underscore doubts that France will meet its EU-designated target of reducing the deficit to 3 per cent in 2015 – already delayed by two years by the European Commission, the EU’s executive arm.

Pierre Moscovici, the finance minister, and Bernard Cazeneuve, the budget minister, said the Cour’s worries about tax receipts were unjustified. But Mr Migaud complained of “recurrent” over-optimistic forecasts underlying government budget projections. “It would be good if these practices ceased,” he said.

Mr Hollande has promised to shift the balance of budget reduction from tax increases to cuts in France’s public spending, currently running at 57 per cent of GDP, one of the highest in Europe.

He has pledged a total of €50bn in spending cuts – equivalent to about 2.5 per cent of GDP – over three years from 2015, after €15bn this year. The aim is to all but eliminate the budget deficit in 2017.

But the Cour warned that it would take more than €50bn in cuts to meet this target – especially if the government were to fulfil its parallel promise to reduce the overall tax burden during the period.

“Even more will be needed if the 2014 targets for spending and deficit reduction are not met and if growth potential is revised downwards,” the Cour said.

It warned that some of the savings promised for 2014 had not yet been detailed and “some appear overestimated”.

It called for “a change in method” for achieving savings, saying the government must engage in fundamental reforms of the public administration to achieve greater efficiency and lower costs.

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