Paris: President Francois Hollande puts his fiscal credibility on the line on Friday when he delivers France’s toughest budget in 30 years in the face of a stagnant economy, record unemployment and plunging poll ratings.
The Socialist leader’s first annual budget, to be presented to the cabinet mid-morning, must make 30 billion euros ($39 billion) in savings to keep deficit-cutting pledges made as part of efforts in the euro zone to ease its sovereign debt crisis.
The belt-tightening, via tax rises for high earners and a freeze on spending, aims to slash the 2013 public deficit to 3 percent of economic output and ensure France’s place beside Germany as a core euro zone power and trusted borrower.
“This budget is about struggle, about reconstruction,” Prime Minister Jean-Marc Ayrault said on France 2 television. “If we abandon the (3 percent) target, our interest rates will rise immediately.”
Economists, however, are concerned the budget goals look ambitious, especially based on a 2013 economic growth forecast of 0.8 percent that is widely seen as over-optimistic.
Data on Friday showed France’s economy posted zero growth in the second quarter, marking nine months of stagnation, as a pickup in business investment and government spending was offset by a worsening trade balance and sluggish consumer expenditure.
Despite a rise in wages, consumers – traditionally the motor of France’s growth – increased their savings to 16.4 percent of income from 16.0 percent a year earlier, amid concern over unemployment at a 10-year high and rising.
Ayrault repeated a pledge to cut unemployment within a year and defended the government’s 0.8 percent growth target as “realistic and within reach”.
The risk of below-target growth raises the chances that Hollande, whose approval ratings have slid as low as 43 percent just four months into his term, may have to make more savings to keep his deficit goals in reach.
Friday’s budget bill is expected to lay out 10 billion euros in expected new revenues from extra taxes on mainly well-off households and another 10 billion from either corporate tax rises or cuts to existing tax breaks.
A further 10 billion will come from keeping a lid on central government spending, continuing a policy of replacing only one in two retiring civil servants and postponing spending. Calls from some economists for broader cuts will be ignored.
Hollande’s promise to cut the deficit to 3 percent of gross domestic product from 4.5 percent this year is a step towards his pledge to balance the budget in 2017.
BNP Paribas economist Helene Baudchon said the target was optimistic and the deficit was likely to come in above 3.0 percent given the weak growth outlook for next year. “As things stand, achieving a deficit of 3.3 percent would in itself be a remarkable outcome,” she said.
Any sign of wavering could not only prompt financial markets to rethink their attitude towards France, in terms of low bond yields, but also trigger further downgrades after Standard & Poor’s stripped France of its triple-A rating this year.
At the same time, the state belt-tightening risks putting further pressure on an economy which has stagnated over the last three quarters to teeter on the brink of recession, while the unemployment rate has risen to a 13-year high above 10 percent.
“It’s a big risk, because it’s possible that, as they try to reduce government spending and return to a balanced budget, they have a negative impact on growth,” said Christopher Bickerton, an associate professor at Paris’ Sciences Po university.