The Week In The Eurozone: France: Budget Revisions
BNP Paribas | Mar 03, 2013 05:28AM ET
The latest unemployment figures released this week for France and Germany are a cruel reminder of the cyclical gap between the two countries. In Germany, unemployment held stable at a low level of 6.9% in February, while in France, the number of category A jobseekers (i.e. with no work for that month) rose for the 21st consecutive month to a total of 3,169k unemployed in January. This surge in unemployment is both a consequence and cause of France’s sluggish economic growth. Indeed, it is one of the arguments used by the European Commission, which now expects growth to be virtually nil in 2013 (+0.1%), instead of the 0.4% growth forecast last fall. Note that the Commission also trimmed its growth forecast for Germany by 0.3 points (from 0.8% to 0.5%), despite a much healthier job market. As things currently stand, zero growth is about the best we can expect in France in 2013, whereas 0.5% seems to be a minimum for Germany. Worse, the growth differential widens in 2014, with German growth estimated at 2% compared to only 1.2% for France.
France’s sluggish growth is concerning for several reasons. First and foremost, it compromises the fiscal consolidation trajectory. Deficit reduction is already well underway, with the structural deficit down 3 points of GDP between 2009 and 2012, even though this is a slower pace than in other countries. France is still far from reaching a balanced budget (Germany has already done so) and the French fiscal deficit, at 4.6% of GDP in 2012, is one of the highest in the eurozone (see chart). In the absence of growth in 2013, the planned 2-point structural effort will not suffice to meet the 3% deficit target. The same goes for 2014, when the deficit is to be cut to 2.2% of GDP based on a 2% growth government forecast. Under current law, the European Commission estimates the French deficit at 3.7% in 2013 and 3.9% in 2014.
Since the lack of growth is the main reason for the budget slippage, the Commission seems to tolerate postponing the 3% target as long as the government continues to pursue reforms and presents a detailed budget savings plan. The government has not yet released its own revised outlook. We would say that, to remain within the authorised limits, the deficit must not exceed 3.5% of GDP in 2013 and must be “significantly” lower than 3% in 2014. We assume 2.5%. According to our estimates, and based on our growth forecasts (0% in 2013; 0.9% in 2014), an additional structural effort of only 0.3 points of GDP would be needed in 2013, but this figure rises to 1 point in 2014.
How can France achieve this without falling into an austerity trap? In 2013, the government already plans to freeze €2bn more in budget credits above the €6.5bn already set aside as reserves.
In 2014, priority will be placed on spending cuts and “secondarily” - according to the term used by François Hollande - on new revenues, at least to counter the declining returns of certain tax increases in the 2013 budget. The government estimates the shortfall in revenues at €6bn. This leaves another 0.7 points of GDP in supplementary fiscal savings, an equivalent of approximately €15bn. This amount comes on top of the €10bn in savings already programmed through 2017, the €5bn planned in 2014 and another €5bn in 2015 to finance part of the CICE competiveness and jobs tax credit.
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In addition to the limits already in place (nominal stability of government spending excluding pensions and debt servicing, ONDAM), the government is exploring potential savings by streamlining the whole set of financial aids granted to firms, the taxation or means testing of family allowances, another reduction in local government allocations, partial de-indexation of pensions and job training. In its annual report, the French Court of Auditors even mentioned the idea of regressive jobless benefits. Although nothing was mentioned on the subject, calling into question the stability of the number of civil servants would give the government another precious leeway.
All of this represents major efforts that will strain activity (which we have integrated in our forecasts). Yet the negative effects are likely to be offset by the decline in the household savings rate and by the positive effects of the competitiveness pact and the agreement on employment.
BY Hélène BAUDCHON
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