Weak economy hits Paris bid to cut deficit
By John Thornhill in Paris
Published: September 26 2008 19:40 | Last updated: September 26 2008 19:40
France’s slowing economy is hindering the government’s attempts to reduce its budget deficit, in spite of what it claimed were unprecedented efforts to control public spending.
The government forecast on Friday that its budget deficit would remain static at 2.7 per cent of gross domestic product this year and next, based on forecasts of 1 per cent economic growth in both years.
Recent data suggest the eurozone’s second-largest economy has been decelerating sharply, with GDP contracting by 0.3 per cent in the second quarter. A cabinet minister warned yesterday that the unemployment figures for August would be “very bad”.
Eric Woerth, budget minister, said the government was reducing its structural budget deficit by 0.5 per cent of GDP per year. But the revenue shortfall that resulted from the economic slowdown meant there would be no improvement in the overall budget deficit in 2009.
On Thursday night, President Nicolas Sarkozy ruled out any further rises in taxes or social charges to balance the public finances, because he said he did not want “to aggravate the recession”. Mr Sarkozy also promised that the state would intervene if necessary to ensure the stability of France’s financial system and underwrite all bank deposits, raising the possibility of additional public spending commitments.
Several independent economists described the government’s growth forecasts for 2009 as over-optimistic, given the severity of the global financial crisis, and predicted France’s budget deficit could exceed the European Union’s 3 per cent ceiling. The government also appeared to back away from a promise to its European partners to balance its budget by 2012, although, Mr Woerth said that might still be possible.
The European Commission is likely to invoke excessive deficit procedures against France if the budget situation deteriorates further. Other EU countries, such as Germany and the Netherlands, that have been more fiscally disciplined than France have also expressed concern, saying the country’s weak finances leave it poorly placed to respond to a further economic slowdown.
François Hollande, secretary of the opposition Socialist party, said that Mr Sarkozy was trying to shift the blame for France’s performance on to external factors but had failed to explain why the country was faring worse than its neighbours.
“We should understand that it is in France that growth is the weakest, that it is in France that unemployment is the highest and that the deficits in trade and public finances are the biggest,” he said.
Mr Sarkozy is even facing criticism from within his own party for not doing more to cut wasteful public spending, which he had promised during last year’s election campaign.
Earlier this week, Alain Lambert, a senator from the governing UMP party, said the government’s failure to tackle the budget deficit was passing on an unpaid bill to grandchildren. In an interview with LCI television, Mr Lambert said that civil service numbers should be cut more aggressively.
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