The coming year is “a crucial one in which the budgetary calculation will be difficult -- more difficult than thought because of slower growth,” Didier Migaud, who heads the audit body, told journalists today in Paris. “It will require an unprecedented brake on spending and higher taxes.”
The auditor’s report comes before Prime Minister Jean-Marc Ayrault lays out an economic plan tomorrow and Finance Minister Pierre Moscovici details a revised budget the following day. Taken together, the events will mark Hollande’s effort to get to grips with France’s budget deficit as growth stalls, after being elected on an anti-austerity platform.
“There will be tax increases, there will be spending cuts,” Moscovici said June 25. “But I reject any talk of austerity. We must avoid a budget policy that hurts economic activity.”
The auditor said today that France needs between 6 billion euros and 10 billion euros in savings this year and 33 billion euros in 2013 to meet deficit-reduction targets. France’s deficit last year amounted to 103 billion euros and the public spending of the government was 358 billion euros, excluding local government and social security.
Ayrault blamed the government of former President Nicolas Sarkozy for the worsening state of French public finances, noting in an e-mailed statement today that the country’s debt rose by 600 billion euros between 2007 and 2011.
With Europe’s debt crisis pushing up borrowing costs in neighboring Spain and Italy, Hollande has little choice but to scale back. His repeated promises to slash the deficit to 4.5 percent of gross domestic product this year and 3 percent have reassured investors, and the government has little room for error, Bank of France Governor Christian Noyer warned.
“French borrowing costs are benefiting from the government’s “inflexibility” on reducing the deficit, Noyer said June 26. The government needs to maintain that consistency because “markets can change their mind quickly,” he added.
France pays about 2.68 percent to borrow for 10 years, compared with 6.33 percent for Spain and 5.80 percent for Italy. The spread between French and German bond yields is at about 112 basis points, down from more than 140 points in mid-May.
Implementing the cuts will be harder than promising them. Hollande’s popularity rating has dropped 7 points this month, with 51 percent of voters expressing confidence in his leadership, according to a CSA poll of 1,005 adults taken June 26 and 27.
Migaud, a former Socialist lawmaker appointed by Sarkozy to the audit body, also warned today that the risk of failing to act now would be that investors and France’s European partners would force more drastic cuts later.
“If this is not done now, the effort will be heavier, more painful and above all imposed by the creditors and our European partners,” he said today. “The sovereign debt crisis shows that the risks are not theoretical.”
Migaud said that France’s debt of 1.7 trillion euros amounts to 62,000 euros per household. The debt burden has risen from 46 percent of gross domestic product in 1993 and 64 percent in 2007 to 86 percent at the end of last year.
The auditor recommended that the government focus on spending cuts rather than tax increases in order to protect French competitiveness. At 56 percent of GDP, French public spending is the second-highest among members of the Organization of Economic Cooperation and Development, behind Denmark.
“Priority must be given to spending cuts,” Migaud said. All international experience shows that savings on expenditure is “less damaging in the short term and more helpful to growth in the long term.”
Prime Minister Ayrault has told ministers to prepare spending cuts for the next three years. The government aims to freeze spending excluding pensions and debt-service costs and has asked departments other than those of education, justice and the interior to reduce total spending by 2.5 percent a year.
Ayrault has also asked ministers to cut operating costs by 7 percent in 2013 and 4 percent each in 2014 and 2015. Today the prime minister again vowed to meet the government’s deficit- reduction targets.
“Growth in 2012 will be weaker than expected by the previous government,” Ayrault said in a statement. This requires “determined action” on the part of the government.”
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