Crisis-hit France admitted it would suffer from slow growth and high budget deficits for at least the next three years as it unveiled Wednesday a gloomy annual budget likely to drew ire from the EU. Finance Minister Michel Sapin told reporters that France's budget deficit would stay above the European Union's maximum limit until 2017, blaming a sluggish eurozone economy and unusually low inflation.
The deficit, which EU rules state must be below three percent of total economic output, will reach this target only in 2017, Sapin said, when it is forecast to fall to 2.8 percent. France had promised Brussels it would get below the three-percent limit next year, but in a dramatic about-turn earlier this month, pushed back the commitment by two years.
Paris has "lived up to its commitments," Sapin insisted. "The pace of deficit reduction has been adapted to the (economic) situation," the finance ministry said in its budget statement. "The French people will not be asked to make additional efforts because, although the government is aware of the seriousness of the budgetary situation ... it refuses to impose austerity." The European Commission, which oversees European countries' budgets, is scheduled to deliver its judgement on France's economic woes next month.
In a twist of irony, it will almost certainly be former French finance minister Pierre Moscovici - appointed EU economic affairs commissioner - who will have to decide on the consequences for France for breaking the rules. The bond market took the news in its stride, probably because Sapin had revealed most of the bad news two weeks previously.
In fact, the interest rate on the 10-year French bond went down to 1.277 percent compared to 1.285 percent the previous day. France is battling through a deep economic crisis, with zero growth in the previous two quarters and sky-high unemployment. Sapin forecast a very gradual recovery for the French economy, which he said would reach a level of two percent growth only in 2018.
The economy is projected to grow by only 0.4 percent this year, recovering progressively to 1.0 percent in 2015, 1.7 percent in 2016 and 1.9 percent in 2017. The minister said the economy would then grow by two percent in 2018 and 2019. "The economic prospects in France and in Europe are not the same that we were promised a few months ago," Sapin admitted. However, only hours after he presented the budget, the High Council of Public Finances attacked the forecasts for being too optimistic.
It said in a statement that poor recent data doesn't point to a rapid pickup in activity needed to reach a 1 percent growth rate next year and the projections for 2016 and 2017 are based on "too favourable hypotheses for the international environment and investment." The response of President Francois Hollande's deeply unpopular government to the crisis has been a controversial package of tax breaks for companies financed by cuts in public spending. Hollande hopes to offer businesses some 40 billion euros ($50 billion) in tax breaks over three years in return for creating 500,000 jobs.
But given the parlous state of France's public finances, he intends to pay for these tax breaks with 50 billion euros in public spending cuts - a measure that has proved highly unpopular with the left flank of Hollande's Socialist Party. Sapin stressed that he would keep the target of 21 billion euros of cuts in public spending this year and 50 billion over three years. "We have a plan and we're sticking to it," he told reporters. "France has never made an effort of this magnitude."
In a symbolic measure of the crisis France is facing, the statistics office announced on Tuesday that the country's national debt had risen above the bar of 2.0 trillion euros for the first time - or 95.1 percent of GDP. European Union rules say that debt must not exceed 60 percent of GDP, or be falling significantly towards this ratio. Sapin predicted that public debt would peak in 2016 at 98 percent of GDP, before dropping back. As part of this effort, he announced that the state would sell around four billion euros in public assets next year.
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