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 TREASURY FOR DO/IM 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. -------------- -------------- Overall Budget Deficit Accounts for 3.7% of GDP . . . -------------- -------------- ¶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. -------------- -------------- . . . mainly due to a Deterioration in Social Security Deficit -------------- -------------- ¶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. -------------- Public Debt Much too High -------------- ¶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. -------------- -------------- GOF Sticks to its 2.9% Budget Deficit Objective for 2005 -------------- -------------- ¶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." -------------- -------------- New Finance Minister Has to Face Opposition Politicians and Unions -------------- -------------- ¶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." -------------- -------------- The European Commission Still Shows Confidence in GOF's Capacity to Reduce Budget Deficit -------------- -------------- ¶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. -------------- Comment -------------- ¶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