UPDATE 3-French '02 deficit up but tax cuts still on
June 27, 2002 08:38 AM ET
By Mark John
PARIS, June 27 (Reuters) - France's new centre-right government unveiled an audit on Thursday showing the public deficit would overshoot its original target by a wide margin this year, but said it would still cut taxes as promised.
The audit showed the deficit would hit 2.3-2.6 percent of gross domestic product this year, far higher than the 1.8-1.9 percent forecast by the Socialist-led government ousted in elections earlier this month.
However, Finance Minister Francis Mer gave an upbeat outlook for growth this year and next and said this should help France go towards meeting a goal agreed with European Union partners to balance its budget in 2004.
"We have the feeling that a growth rate in the order of three percent is not impossible," Mer told reporters after presenting the audit.
"This would help us significantly to go in the direction of our (European) commitments," he said, adding: "We will do our best to get there."
The release of the new deficit figure, calculated by the same two experts who conducted a similar audit for the previous government when it took office in 1997, came amid doubts France can balance its budget by 2004.
Mer's view that growth of three percent next year is possible is crucial as the new government has said the 2004 break-even target is conditional on the French economy expanding at this pace in 2003. Economists believe this is unlikely.
Keeping the pressure on France to meet its EU obligations, the bloc's executive branch -- the European Commission -- said it wanted the French government to bear down on its budget deficit.
"We want to see what actions the French government intends to undertake so as to bring about continuation of budget consolidation in the course of 2002," said Gerassimos Thomas, economic and monetary affairs spokesman at the Commission.
CAUTION
The new deficit forecast will take the figure dangerously close to a limit of three percent of GDP set under the European Union's Stability and Growth Pact -- an accord designed to boost the credibility of the euro currency.
"The spread of public deficits for 2002 is estimated between 2.3 and 2.6 percent of GDP," said an official statement on the audit. "To be cautious, we take the higher figure of the spread, 2.6 percent, as the benchmark figure."
In 2001, France's public deficit was 1.4 percent of GDP.
Mer blasted the previous government for letting France's public finances deteriorate. The difference between the new deficit forecast and that of the preceding government was the equivalent of 15 billion euros, he said.
Roughly two thirds of that figure was accounted for by public expenditure overruns and the remaining third by over-optimistic expectations on tax revenues.
"This shows a complete inability to control the accounts," Mer said, adding that expenditure had been underestimated "sometimes consciously, sometimes unconsciously."
TAX CUT
Despite the swelling deficit, the government would push ahead with a plan to cut taxes.
"In the coming days, the government will honour its pledge to cut income tax by five percent," it said, adding the cost of the tax cut would be only 0.15 percent of GDP.
Jacques Barrot, parliamentary leader for President Jacques Chirac's Union for the Presidential Majority (UMP) party, said the worsened budget outlook meant the government might have to delay implementing some of its campaign promises.
"The government will not give up any of its targets, but it's true it will probably have to take into account in its legislative calendar the worsened situation it has inherited," he told reporters after a budget briefing at the parliament.
An interim budget would be presented to the cabinet on July 10, the government said.
Mer made no mention at a news conference of a pledge made by Chirac to introduce 30 billion euros ($29.53 billion) worth of staggered tax cuts over five years and boost spending on anti-crime measures and defence.
Chirac made these promises during his campaign for the re-election he won on May 5, during which he also began to question the target for wiping out the public deficit in 2004 -- an agreement made under the auspices of the Stability Pact.
Some EU members worry that letting slip the 2004 date for wiping out budget deficits in France, Germany, Italy and Portugal will force the European Central Bank to raise interest rates to stop economies overheating. |
