FRENCH BUDGET DEFICIT AT 3.7-3.8 PERCENT OF GDP IN

UNCLAS SECTION 01 OF 03 PARIS 001456

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR
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TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRENCH BUDGET DEFICIT AT 3.7-3.8 PERCENT OF GDP IN
2004

REF: PARIS 001050


1. SUMMARY. The 2004 overall budget deficit for France is
reported to be 3.7% of GDP. The deterioration over the
expected 3.6% deficit is mainly due to a rise in social
security expenditures, notably health insurance. France's
public debt amounted to 65.6% of GDP in 2004, also exceeding
the 60% limit. Nevertheless, the European Commissioner for
Economic Affairs expressed confidence in France's commitment
to reduce its budget deficit to 2.9% of GDP in 2005. New
Finance Minister Thierry Breton has the power to tackle
central government expenditure growth, but he has little
influence over social security expenditures, a much more
delicate problem to handle. Reducing the budget deficit and
the public debt will depend on the success of the GOF
program to boost economic growth and employment, while being
mindful of opposition politicians' and unions' rejection of
reforms. END SUMMARY.

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Overall Budget Deficit Accounts for 3.7% of GDP . . .
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2. As expected, the National and Statistical Agency INSEE
provided its 2004 budget estimates to the European
Commission on March 1. INSEE revised the 2004 overall
budget deficit upward (based on Maastricht definitions) to
3.7% of GDP or 59.8 billion euros compared to an initial
estimate of 3.6%. Although this is an improvement over the
4.2% registered in 2003 (revised from 4.1%),it confirms
that the budget deficit is significantly higher than the 3%
European stability and growth pact limit.

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. . . mainly due to a Deterioration in Social Security
Deficit
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3. Based on a national income accounts basis, the overall
budget deficit amounted to 60.3 billion euros:
-The social security deficit more than tripled in two years,
increasing to 13.8 billion euros, notably due to a 4.8%
increase in health insurance expenditures.
-Also bad, for the first time in ten years, local
authorities' budget posted a deficit (2.2 billion euros). -
On the positive side, the central government excluding
miscellaneous administrative units (CG) budget deficit was
lower than expected, decreasing to 51.5 billion euros from
62.3 billion euros in 2003.


4. INSEE's budget estimates for 2004 include a 1.6 billion
euro one-time payment made by EDF and COGEMA to CEA for the
dismantling of the Marcoule nuclear site. If the European
Statistical Office Eurostat refuses to take this payment
into account as a budget receipt, the French budget deficit
would be as high as 3.8% of GDP.

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Public Debt Much too High
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5. Public debt continues to significantly exceed the 60%
Stability and Growth Pact limit, with public debt amounting
to 1,065.4 billion euros or to 65.6% of GDP. The GOF missed
its goal of reducing public debt to 64.8% of GDP in 2004.
Finance ministry specialists argued that the CG, the social
security fund (ACOSS),and the fund in charge of the social
security debt management (CADES) overestimated their
financial needs, over-issuing securities in 2004. The debt
figure also includes acquisitions of private securities by
the Retirement Reserve Fund ("Fonds de Reserve des
Retraites") and complementary retirement funds AGIR-ARRCO.


6. The increase in the public debt contributed to the
fuelling of budget expenditures in 2004 by generating 47.2
billion euros in interest payments. Reducing the debt
service (repayments of funds and interest payments) requires
cutting the overall budget deficit to 2.5% of GDP.

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GOF Sticks to its 2.9% Budget Deficit Objective for 2005
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7. New Finance Minister Thierry Breton indicated in his
first speech as minister before deputies that he would
continue to pursue policy set out by his predecessors,
notably Gaymard (ref),confirming that reducing the budget
deficit was a priority. Reacting to the INSEE's budget
figures, he stated on March 2 that he would be
"uncompromisingly tough" on public spending control in order
to have more freedom to maneuver on employment, the
purchasing power of the French, economic growth and
innovation. "We don't have a minute to lose," he added.
Budget Minister Jean-Francois Cope echoed his words by
adding "I will be, with Thierry Breton, particularly
attentive to keeping a tight lid on budget spending growth."

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New Finance Minister Has to Face Opposition Politicians and
Unions
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8. Opposition politicians have already protested that a
bumper season of corporate earnings from French companies
has not been used to create jobs. Both the exceptional
profits made by companies in 2004, and the increase in the
unemployment rate to 10% percent in January, its highest
level in five years, have made newspaper headlines. Breton
called the unemployment rate "unacceptable," saying "France
is not a company, but it has advantages; I have to set them
to music... We have to restore businessmen and employees'
desire to fight."


9. Leftist unions CGT and FO called on all employees in the
private and public sectors to strike on March 10, also
asking the unemployed and retirees to join demonstrations
and locally organized meetings. Unions intend to protest
against low wage increases, the reform of the 35-hour
workweek, and the lack of job creation. A CGT
representative emphasized that this national strike day was
planned many weeks ago, and it became inter-sector and inter-
union due to "the autism of the GOF, the business
organization MEDEF, and many leaderships."

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The European Commission Still Shows Confidence in GOF's
Capacity to Reduce Budget Deficit
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10. On March 2, Amelia Torres speaking for European
Commissioner for Economic Affairs Joaquin Almunia said that
the Commission was still confident in the GOF's capacity to
reduce its budget deficit within the Pact and Stability
Growth limit. Nonetheless, she warned that the Commission
was "vigilant" as the French budget situation "remains
fragile," and the Commission has not yet reviewed budget
figures just provided by INSEE. Eurostat will give its
decisions on budget figures for France (including the one-
time payment to CEA) and other EU countries on March 18.
The Commission will release its own economic forecasts on
March 21. Torres eventually said "we'll see where we are
for each EU country after March 21." Private-sector
economists are skeptical about the GOF's 2005 budget deficit
objective given the economic slowdown in Europe, which will
not help France to achieve 2.5% GDP growth in 2005.

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Comment
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11. Breton is described as a successful and pragmatic
manager at the head of Bull, Thomson and France Telecom.
Thus, he may achieve further reduction in the CG budget
deficit by restraining CG budget spending. Implementing
stricter control of health insurance spending will be harder
as Breton does not have the lead on this issue. The success
of the health insurance reform will also require the
cooperation of the medical sector, a sector that has already
expressed its discontent. Recent increases in prices of
consultations approved by the GOF may not calm those in the
sector who believe that reform is creating a "two-speed
health system", one for the wealthy and one for others.


12. Reducing the budget deficit by increasing receipts will
heavily depend on economic growth and job creation, and
therefore on the GOF's ability to implement its program of
measures and reforms (ref) as soon as possible. The GOF has
to take account of opposition politicians and unions'
reactions.
LEACH