France on Wednesday said it would reduce public spending further to offset lower-than-expected tax revenues but stuck to forecasts for growth of 1.5 percent this year and next despite more pessimistic estimates by international organisations. To meet its deficit reduction targets, Paris will seek 3.8 billion euros ($4.33 billion) of extra spending cuts this year and 5 billion euros in 2017 on top of those planned in this year's budget bill, the finance ministry said.
The additional spending cuts, which the government said would come from the state and social security budgets in 2016 as well as lower interest rates, became necessary after sharply lower inflation reduced sales tax receipts. In a deficit reduction programme which euro zone members send to the European Commission, the ministry said it was cutting its inflation target to just 0.1 percent for 2016, down from the 1.0 percent it had foreseen in the 2016 budget bill voted last year.
The extra spending cuts mean France kept its public deficit targets unchanged at 3.3 percent of gross domestic product this year and 2.7 percent in 2017. France cut its public deficit more than expected last year, to 3.5 percent, after having won a two-year reprieve from its euro zone peers to bring the shortfall below the EU cap of 3 percent of economic output.
The country's public finances watchdog, an independent body set up by the current government, said on Wednesday, however, that the government underestimated the size of the structural deficit and, therefore, of the efforts needed to balance France's budget position over the coming years.
Asked about the watchdog's opinion, Finance Minister Michel Sapin told a news conference every institution had a different definition of the structural deficit and that the government was focusing on its nominal deficit target. However, slower global growth, especially among big emerging markets such as China, Russia and Brazil, is leading economists to doubt the Socialist government's growth targets.
On Tuesday, the International Monetary Fund cut its global growth forecast for the fourth time in a year and said it now expected France's economy to grow by 1.1 percent in 2016 and 1.3 percent in 2017. Sapin said the government's growth estimate had also been criticised last year as too optimistic at the time but was eventually exceeded. "We won't change it according to the mood of the day, 1.5 percent is our anchor, it's this anchor we maintain today," Sapin said. The watchdog said the 2016 growth forecast was at the top of the range of economists' estimates but still within reach.