France's social security deficit could be the latest banana skin in the path of budget deficit reduction in the euro zone's second biggest economy. Paris's commitment to cutting its budget deficit is already seen at risk from planned tax breaks which are expected to cost the government coffers some money this year and 11 billion euros in 2008.
Even before the French government has revealed exactly how it intends to finance such measures, there are warning signals that social security spending could be a bigger-than-expected burden on public finances this year.
The president of the state audit office said last week that early trends for 2007 showed a risk of a deterioration in the social security deficit and a report in Tuesday's Les Echos newspaper suggested this could be confirmed next week.
The paper said the social security accounts commission would next week say the pensions system was set to run a deficit of 4.5 billion euros in 2007, one billion euros higher than originally planned and up from 1.9 billion euros in 2006.
The forecasting error was largely ascribed by the newspaper to the government's misplaced hope that people would defer retirement after the introduction of a premium intended for people working beyond their permitted retirement age.
An official at the Social Security office could not confirm the report in Les Echos and declined to comment. Nor is the pensions system the only source of slippage in French social security spending.
A budget watchdog issued an unprecedented warning to the government in May over health insurance spending, saying there was a risk that such spending could exceed earlier forecasts by more than 1.1 billion euros in 2007.
It was the first time the official "alert committee" had sounded the alarm over health accounts, which make up the largest part of the social security deficit, and the health insurance office was given a month to come up with measures to address the risks.
President Nicolas Sarkozy has already proposed patients pay some part of the cost of drugs, tests, doctors' visits and hospital stays but the government has yet to take a decision on any such measure.
However, financial market analysts said hefty spending cuts in the short term and deeper social security reforms in the longer term would be necessary if France was to keep cutting its budget progressively with the aim of balancing its budget.
Paris earlier this year submitted medium-term budget plans to the European Commission in which it forecast it would run budget deficits of 2.5 percent of GDP in 2007, 1.8 percent in 2008 and 0.9 percent in 2009, then balance its budget in 2010.
That compares with France's 2006 deficit of 2.5 percent of GDP. "At the very best we will not have a reduction in the deficit this year as that seems completely impossible," said Olivier Gasnier, economist at Societe Generale in Paris.
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