Last updated: April 2, 2013 4:37 pm

French cuts threaten health of ‘le tabac’

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Red and orange lights in France for a Tabac tobacconist Space for text©Alamy

Tabac owners who have stayed in business have seen a 54 per cent increase in average income during the period – excluding the subsidies

Like so many French institutions, the traditional small shops and bars that dot the country’s streets dispensing cigarettes and a coffee or pastis enjoy a state subsidy. From 2004 to 2011, these outlets, flagged by their distinctive tabac signs, were given no less than €2.6bn.

The aid was instigated to compensate owners for rises in tobacco taxes. But those who have stayed in business have seen a 54 per cent increase in average income during the period – excluding the subsidies. Including the subsidies, their income rose 67 per cent.

This example of apparently wasted state money was just one of many spelt out in this year’s annual report by the Cour des Comptes, the national auditor, to back its call for President François Hollande’s socialist government to take an axe to the huge public spending bill as the surest way to restore the public finances.

“The absolute priority now is to intensify the effort to bring under control spending across the ensemble of the public sector,” it declared.

Mr Hollande himself has acknowledged that the state has got too big. “Public spending has reached 57 per cent of national wealth. It was 52 per cent five years ago. Do we live better for it? No,” he said late last year.

With the economy stalling, the government is seeking approval from its European partners to delay its commitment to bring its budget deficit down to 3 per cent of gross domestic product until next year. But the slowdown in the improvement in the public finances has raised the pressure on Mr Hollande to focus on spending cuts.

The government admits that it has run out of room to increase taxes, with the tax burden now equal to more than 46 per cent of GDP – one of the highest in the EU. This leaves Mr Hollande, who campaigned against austerity, having to persuade the country to accept a programme of public spending curbs of at least €60bn through 2017 from a total currently running at about €1.2tn a year.

There is nervousness in socialist party ranks – and outright hostility further to the left. But the European Commission, the Cour des Comptes and a slew of economists argue that such is the bloated nature of the public sector that there is plenty of scope to cut.

“If France were at the same level [of public spending] as Germany [45 per cent of GDP], whose social model is not so very different, its public spending would be €214bn lower,” brokerage Oddo Securities wrote in a recent note. “In other words the target of €60bn in savings in the space of five years is not overly ambitious.”

Agnès Verdier-Molinié is director of the think-tank iFrap and author of a new book called 60bn of Cuts! , with the telling subtitle: “Yes, but every year.” She says: “The problem is not the public services, it is the cost of producing those public services. We can lower the cost of public spending without affecting the quality of service.”

She maintains that a secret report commissioned by the previous centre-right government set out €60bn of cuts through a 5 per cent trim from each of the three main areas of central state expenditure, which totals about €400bn, local authority spending (€200bn) and social welfare (€600bn). Her key argument is that such savings are readily available due to the millefeuille of overlaps, inefficiencies and overgenerous handouts that pervade the system.

“The reason spending has exploded is the multitude of different benefits and all the layers of administration,” she says.

For example, the Organisation of Economic Co-operation and Development pointed out in a report in March that France had no fewer than 36,700 local authorities, with an average number of inhabitants of 1,800, compared with 5,500 across the EU.

Tackling local government reform and public employment levels is part of a series of government reviews now under way to decide on savings. Just as sensitive are potential reforms of the pension system, the health service, France’s generous family support regime, and other welfare supports such as unemployment benefits, where individual payments can reach more than €5,000 a month for those previously in high-paid jobs.

With a forecast pension deficit of €20bn in 2020, Mr Hollande has promised renewed reforms later this year, saying people will have to make longer contributions. But, having restored the right of some workers to retire at 60, he has so far shied away from raising the standard minimum retirement age of 62, which remains well below the pension age in many other European countries.

Mr Hollande has also clearly signalled that the government will introduce some kind of means testing of family benefits in a system which currently pays €127 a month to all families with two children, €291 for three children and an extra €163 for each one after that.

“A better control of spending must include a review of family benefits, notably a better targeting of the most vulnerable,” said the Cour des Comptes in its report.

Given the scale and sensitivity of these welfare challenges, it was little wonder that the Cour concluded that the subsidies to the tabacs should be cut off “rapidly and completely”.

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