April 17, 2013 1:47 pm

France relaxes budget targets

France’s socialist government has set out its stall against imposing fresh austerity measures this year. Instead, it has reacted to faltering growth by delaying targets for cutting its budget deficit, a strategy that it must now persuade its European partners to approve.

François Hollande said he remained committed to “budgetary responsibility” to reduce France’s debt burden “over the medium term”.

But the president said in a speech to the Organisation for Economic Co-operation and Development: “The solution to the crisis is not austerity, it is credibility, sustainability and stability.”

He was speaking as the government set out a revamped stability plan that would postpone hitting the EU-defined 2013 budget deficit target of 3 per cent of gross domestic product until next year. It has rejected taking steps to reduce the 2013 deficit, now forecast to hit 3.7 per cent, and set a target for 2014 of 2.9 per cent.

“[The government] has made the rational choice to fix a target for 2014 in order not to compromise the recovery of economic activity by more measures of rigour,” it said.

The plan is based on reduced growth projections of 0.1 per cent this year and 1.2 per cent in 2014, still regarded as optimistic by most independent forecasts, including the new French watchdog for the public finances. It nonetheless included slippage in target dates for reducing debt, now set to peak at 94.3 per cent of GDP next year, and the level of public spending and taxes in the economy.

Paris now faces weeks of talks with the European Commission, which can demand changes in the plan under new EU budgetary rules. Berlin, anxious that France keeps its public finances on track, is also set to wield its influence. Angela Merkel, the German chancellor, said she “wished success” for France, adding that Germany would watch its progress “in a friendly manner”.

Her government on Wednesday published a stability programme, which admitted that even Germany would return to deficit in 2013 because of slow growth, expected to be just 0.5 per cent. It promised to reduce debt from 80.5 per cent of GDP to under 70 per cent in 2017.

Attention on France will centre on whether Paris should be tougher on public spending and push faster on other reforms – and whether its growth projections are realistic.

The plan envisages the nominal deficit falling to 0.7 per cent of GDP in 2017, the year Mr Hollande had originally pledged a balanced budget. But ministers want to shift the emphasis to the structural deficit, which excludes the short-term effects of a downturn, saying it is being reduced according to original targets and will be eliminated in 2016.

One senior official on Wednesday criticised the “fetishism” of concentrating on nominal deficit targets.

Public spending is set to reach 56.9 per cent of GDP this year and to drop only slightly next year. The tax burden will rise to 46.5 per cent of GDP next year and remain at that level for three years.

The government said it remained committed to budget and other structural reforms, saying spending cuts would account for 70 per cent of savings from next year, a reversal of the heavy reliance on tax increases in 2012 and 2013. It promised €14bn of public spending savings in 2014.

But overall public spending will continue to increase in real terms between 2012 and 2017, although at just 0.5 per cent, a much lower pace than in the past decade.

In depth

Austerity Europe

EU unemployment

Europeans are braced for more austerity as governments across the region try to eliminate unsustainable budget deficits

The government has adopted the commission’s own latest growth forecasts. But Fabrice Montagne, an economist at Barclays in Paris, pointed out that these were based on a projected deficit of 3.9 per cent, so did not take into account the damaging effect on growth of measures to bring the deficit under the 3 per cent barrier. “There is an inconsistency here,” he said.

Under recently agreed rules for the eurozone, the commission now has the power to insist on changes before the government’s plan is put to parliament. “It will be very interesting to see if they use this power in the French case,” Mr Montagne said.

Additional reporting by Peter Ehrlich in Berlin

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