Identifier
Created
Classification
Origin
05PARIS175
2005-01-10 18:57:00
UNCLASSIFIED
Embassy Paris
Cable title:  

2005 CENTRAL GOVERNMENT BUDGET, PART III:

Tags:  EFIN ECON PGOV FR PBIO 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 PARIS 000175 

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 PBIO
SUBJECT: 2005 CENTRAL GOVERNMENT BUDGET, PART III:
EPILOGUE

REF: (A) Paris 8860 ; (B) Paris 9110 ; (C) Paris 8612

UNCLAS SECTION 01 OF 03 PARIS 000175

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 PBIO
SUBJECT: 2005 CENTRAL GOVERNMENT BUDGET, PART III:
EPILOGUE

REF: (A) Paris 8860 ; (B) Paris 9110 ; (C) Paris 8612


1. SUMMARY. This is the last in a series of cables on the
2005 GOF central government (CG) budget. This cable
analyzes the questionable assumptions upon which the budget
bill was based, and analyzes the budget as finally passed.
Final passage of the 2005 budget law occurred December 30
with publication in the French Official Journal. Despite
expressing strong confidence in its scenario, the GOF
nonetheless announced in January it would restrain
spending. In a marked shift of economic policy, the
government has decided to subsidize job creation. END
SUMMARY.

--------------
Unexpected Spending Related to Oil Prices
--------------


2. The 2005 French budget was signed into law and
published in the French Official Journal on December 30.
No significant modifications were added to the bill prior
to passage, so details are as described ref B. The budget
assumptions, therefore, incorporate the biggest
uncertainties arising at the end of the year, namely, the
rise in value of the euro and increased oil prices. The
budget also assumes significant one-time receipts will be
realized after partial privatization in 2005 of publicly
held energy companies EDF and GDF. EDF will transfer 7
billion euro to the CG to pay pensions in the future for
EDF's employees, who currently have a status similar to
civil servants.


3. In France, oil prices are exacerbated by a very high
domestic tax on petroleum products ("Taxe interieure sur
les produits petroliers - TIPP). Former Finance Minister
Sarkozy promised to provide 123 million euros support to
groups hard-pressed by high oil prices, including farmers,
fishermen, and truck drivers. The GOF also planned to use
value-added tax (VAT) receipts on oil to reduce the effect
of the TIPP due to windfall VAT receipts. After opposition
arose from other EU members who argued such plans should be
coordinated within the EU to avoid threatening competition,
Sarkozy announced the creation of a special commission to
examine a decrease in the TIPP. Such a decrease was not
examined as persistent oil price increases caused a

decrease in gas consumption, reducing expected windfall VAT
receipts. Eventually, the GOF decided to pay an extra
benefit of 70 euros to retirees receiving minimum old-age
allowance ("allocation vieillesse minimum") to help them
pay for heating bills. Nevertheless, these new
expenditures did not get added to projected 2005
expenditures since the GOF was able to fund them with the
windfall VAT receipts.

-------------- --------------
Despite High Oil Prices and Euro, GOF Sticks to its
Optimistic 2.5% GDP Growth
-------------- --------------


4. Increasing oil prices and euro both cast a shadow over
the GOF scenario when it introduced the CG budget in
September. But the new situation failed to dampen the
GOF's 2.5% GDP growth forecast. Since September, Prime
Minister Jean-Pierre Raffarin has kept repeating that GDP
is growing at a 2.5% annual pace, and he has never altered
that prediction despite poor third quarter GDP growth (ref
C). He acknowledged that the rise in oil prices was high,
but argued that business confidence remains high as well.
Recently, new Finance Minister Herve Gaymard opined "we
have a forecast of 2.5% growth in 2005 which is realistic."
The slide in the dollar "should not continue" and is an
issue for U.S. and Asian monetary authorities, as well as
European ones. The OECD forecast a recovery in the French
economy in 2005, but downgraded its GDP growth forecast for
France to 2.1% from 2.6%.

-------------- --------------
Left and Part of Center-right Criticize the Budget
-------------- --------------


5. Communists highlighted "insufficiencies of a budget
that is far from addressing emergencies and needs related
to rising unemployment and poverty." Former Socialist
Finance Minister Dominique Strauss-Kahn described the 2005
CG budget as a budget with no economic strategy, based on
an unrealistic 2.5% GDP growth forecast. His guess is that
GDP growth will not be higher than 2 percent in 2005 as oil
prices will be closer to USD 45 per barrel than USD 36.5,
the assumption of the GOF forecast. He also stated that
the purchasing power of the French would fall in any case
since social taxes will be increased by 6 billion euros
(the social security deficit will be reported separately).
He also warned against a net decrease in youth job
creation, and no social progress since inheritance taxes
will benefit less than 20 percent of the population and be
costly (600 million euros). Socialists and Communists
criticized inheritance taxes and a 50 percent increase in
the tax relief for employing domestic help, as gifts to the
GOF's electorate. In a letter to Le Monde newspaper,
Sarkozy denied that the reform of inheritance taxes would
only benefit the rich, arguing that 70 percent of the
public approved the change. "The tax cut stems from the
need not to penalize initiative, not to discourage
individual effort, and it responds to the concern of many
people that the fruit of their work should be handed on to
their heirs."


6. To respond to the criticism from the left, the
Conservative majority made its "Social Cohesion" plans a
priority, backtracking from its liberal (in the French
sense) strategy of no longer subsidizing job creation to
fight unemployment.


7. The center-right Democratic Union party (UDF) announced
it would abstain on the budget if the zero-interest loan
scheme to home-buyers ("PTZ") was eliminated, the increase
in the tax relief for employing domestic help did not take
into account the size of families, and if the GOF
maintained its reform of rights to pensions paid to
surviving spouses of retirees ("pension de reversion").
This new reform was planned as part of the 2005 social
security budget. Eventually, UDF passed the budget as the
GOF backtracked on the pension issue, and listened to UDF's
concerns about PTZ and the tax relief for employing
domestic help.


8. Deputies contested several technical provisions,
resorting to the Constitutional Council, which can review
bills and strike unconstitutional clauses before their
passage. The Council suppressed a clause in the budget
bill limiting the effect of measures designed to prevent
job outsourcing. As a result, all companies (not only
companies located in certain zones) can benefit from
professional tax deductions if they do not move jobs
overseas. The Constitutional Council also removed an
article on the role of the Tax Council ("Conseil des
Impots"),deeming that it was not a budget issue. The
initial idea proposed by former center-right minister Jean
Arthuis was to transform the Tax Council into a "Conseil
des Prelevements obligatoires" that could examine the
spectrum of all taxes including social contributions (44%
of GDP),and how taxes at large affect taxpayers. The Tax
Council is administratively related to the Cour des Comptes
(roughly equivalent to the GAO).

--------------
COMMENT
--------------


9. The main problem with the budget is that the GOF 2005
GDP growth forecast is too optimistic. Even if the French
economy grows at 2.5 percent, the resulting higher tax
receipts might not be sufficient to reduce the budget
deficit if even just a few budget expenditures are
undervalued. 2005 CG expenditures amount to 242.7 billion
euros, setting the deficit at 45.2 billion euros. The 2005
CG budget deficit could even deteriorate in absolute terms
compared to 2004, since the 2004 CG deficit was revised to
49.3 billion euros (ref D),and eventually adjusted to 49.5
billion euros by the Parliament. The GOF announced in
January 2005 it is limiting spending by 4 billion euros to
ensure stability in expenditure growth.


10. Another troubling aspect of the budget bill is the
reliance on one-time budget boosts. There is nothing wrong
with the one-off payment from EDF and GDF, which is a
financial transfer similar to the 1997 transfer from France
Telecom, but it cannot be repeated every year, nor resolve
the structural budget deficit associated with the sheer
size of the GOF.
LEACH