State Auditor Warns That France Must Cut Spending

The Court of Auditors, France’s official accounting agency, noted that public finances had been held in check for several years through higher taxes and control of spending. But it said the policy had now reached its limits. If the European Union’s 3 percent budget deficit target is to be reached by 2015, the report said, structural spending cuts “on the order of” 13 billion euros, or $17 billion, would be needed in 2014 along with 15 billion euros of cuts in 2015.

French tax increases have brought howls of protest from businesses and higher-income taxpayers, and led to a flight of the country’swealthy to lower-tax destinations like Britain, Belgium and Switzerland.

Mr. Hollande and his finance minister, Pierre Moscovici, have already vowed that taxes will not increase further, and that their task over next few years is to cut spending. But they have been vague on how they intend to do it. And so far, Mr. Hollande has repeatedly had to revise his budget deficit targets because he was unable to meet them, even prompting Brussels to acknowledge that France would need more time. Newly gloomy economic indicators released Thursday will not make the task any easier.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at B.N.P. Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of G.D.P. last year, the auditors found, up from 55.9 percent in 2011 — and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

“It’s one thing to say spending cuts are necessary,” Mr. Moëc said, “and another thing altogether to flesh them out.”

Mr. d’Arvisenet noted that about 80 percent of all the progress in cutting the deficit in recent years had come from tax increases, something that he said “obviously” could not be long sustained. The French auditors’ findings are consistent with the advice of the International Monetary Fund and the European Commission, he added.

The central government in Paris has sometimes chosen to save money by reducing transfers to the provinces. Planned overhauls of the pension, family benefits and unemployment insurance systems could also help over the medium term. But there is little sign of the kind of immediate measures that would be needed to bring the deficit down to 3 percent.

The Court of Auditors said the 2013 budget deficit was likely to come in between 3.8 percent and 4.1 percent of G.D.P., as receipts of corporate and sales taxes decline and the economy shrinks. While that would mark a decline from 4.8 percent last year, it remains above the 3.7 percent for which Mr. Hollande’s government has been aiming.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than those of some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

The jobless rate stood at 11 percent in April, according to Eurostat, the European Union’s statistical agency. Expectations that it will rise further are weighing on consumer confidence.

French household sentiment reached an all-time low in June, Insee said Thursday, with its main consumer sentiment index falling to 78, down one point from the May reading, which had itself been a record low.

France, like the other 16 euro members, is obligated by treaty to hold its deficit to around 3 percent of G.D.P. and its debt to 60 percent of G.D.P. Mr. Hollande committed to meeting the deficit target in his 2012 presidential campaign. But European officials, bowing to the inevitable, in late May gave France until 2015 to achieve it in return for action on pension and labor reforms.

Among the major euro zone economies, only Germany is currently on track to meet the E.U. budget target, with a deficit of only 0.2 percent of G.D.P. forecast for this year, according to the Organization for Economic Cooperation and Development. The United States, in contrast, is likely to record a 2013 budget deficit of 5.4 percent, the O.E.C.D. said.

Many economists argue that the deficit rules are counterproductive in an economic downturn, because cutting government spending adds to the downward pressure on demand. The mathematical logic of the deficit-to-G.D.P. equation dictates that, even when spending is unchanged, the outcome is worse if the economy shrinks.

Despite the skepticism about austerity, and recent signs of relaxation in the rhetoric, the orthodox view, championed by Chancellor Angela Merkel of Germany and her allies, continues to hold sway in Europe.

In Britain, Prime Minister David Cameron’s government on Wednesday announced 11.5 billion pounds, or $17.5 billion, more of spending cuts to be enacted over the next few years. The Office of National Statistics reported Thursday that the British economy grew by only 0.3 percent in the first quarter, a 1.2 percent annualized rate.

But that was an upward revision from the previous estimate. The office said that, contrary to earlier readings, the British economy did not slip into a “double-dip” recession last quarter of 2011 and the first quarter of 2012.

Article source: http://www.nytimes.com/2013/06/28/business/global/state-auditor-warns-that-france-must-cut-spending.html?partner=rss&emc=rss