FRANCE REVISES 2005 CENTRAL GOVERNMENT BUDGET

UNCLAS SECTION 01 OF 03 PARIS 008622

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E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRANCE REVISES 2005 CENTRAL GOVERNMENT BUDGET

REF: Paris 7771


1. SUMMARY: The GOF revised its 2005 central government
budget to include additional social expenditures and revised
receipts including transfers to local authorities. The
revised budget includes measures dear to President Chirac: a
tax on airline tickets to help fund development aid, and tax
cuts on future capital gains. The government offset
additional expenditures, but the 2005 general government
deficit probably will exceed 3.0% of GDP. END SUMMARY.

Government Commits Not to Increase Central Government Budget
Deficit
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2. Finance Minister Thierry Breton and Budget Minister Jean-
Francois Cope introduced the revised 2005 central government
(CG) budget on November 23, 2005. The 2005 CG budget
deficit is now set at 44.1 billion euros, an estimate the
government believes is consistent with a 46.8 billion euro
cash-basis deficit, which includes 2 billion euro carry-
overs from 2004. In fall 2004, when the Parliament passed
the 2005 appropriations bill, the deficit was set at 44.9
billion euros.


3. The revised 2005 budget takes into account additional
spending (about 1 billion euros) for:
-An increase in already-planned expenditures (490 million
euros) [particularly government guarantees (200 million
euros)], compensation for victims of anti-semitic acts (134
million euros),justice fees and civil compensation (75
million euros),and government-subsidized loans (35 million
euros);
-Additional social spending (300 million euros) including
government housing programs (155 million euros),allowances
to the handicapped (78 million euros),allowances for single
parents (32 million euros),and medical assistance (27
million euros); and
-Miscellaneous spending (240 million euros),including
compensation for the 2003 drought (50 million euros),public
transportation (31 million euros),and official development
assistance (27 million euros).

The Government Funds French CNN
--------------

4. Proving that the GOF still can find a place for pork-
barrel projects, or perhaps reflecting its cultural
diversity priorities, the government gave the green light on
November 30 for an international French-language TV news
channel to start broadcasting by the end of next year. The
government committed to funding the channel under an
agreement lasting until 2010. Thirty million euros were set
aside for this project in the 2005 CG budget.

Putting a Lid on Total Spending
--------------

5. The government emphasized that, for the third year, the
amount of the CG budget passed by the Parliament will be
strictly observed. Additional spending is mostly offset by
900 million euro cuts in other parts of the CG budget,
notably the public service debt (730 million euros) thanks
to lower-than-projected interest rates. Total cuts (6
billion euros) offset unexpected expenditures made in
February, April, September and November, notably emergency
measures to prevent avian flu (1 billion euros).


6. Minister Breton also highlighted government efforts to
control the volume of spending in 2005. He said limiting
exceptions to the new rule of not carrying over more than 3%
of spending would result in a significant reduction of the
"carry-over bubble." He explained this would reduce the
need to set aside significant reserves at the beginning of
each year (7.4 billion in 2005). The government plans to
reduce carry-overs from 9.7 billion euros in 2005 to around
5 billion euros in 2006, a big improvement compared with the
14.1 billion euros carried over in 2002.

Cuts in Spending Offset Lower-than-Expected Receipts
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7. As part of the 6 billion euro cut in CG spending, a 3.1
billion euro cut in CG spending was made in November to
offset a reduction of approximately 2 billion euros in tax
receipts. CG income tax receipts were expected to be lower
due to sluggish economic growth. GDP growth is likely to be
no higher than 1.5% in 2005, much lower than the initial
government forecast of 2.5% (ref).


8. Government transfers to local authorities (departments)
will total 510 million euros, including 457 million euros in
tax on petroleum products, to pay for new local-level social
responsibilities, notably for granting minimum wages (Revenu
Minimum d'Insertion - RMI; and Revenu Minimum d'Activite
RMA). The government claims the 510 million euro transfer
will be offset by higher receipts from the exceptional levy
on distributed profits due to the reform of the tax credit
(250 million euros) and the revised schedule of corporate
tax payments (300 million euros).
Budget Reflects Chirac's commitment to "International
Solidarity" and . . .
-------------- --------------

9. As part of the revised 2005 CG budget, the government
approved President Chirac's plan to levy a new tax on
airline tickets sold in France, in order to raise funds for
development programs in developing countries, notably the
fight against AIDS. The tax, which should go into effect in
July 2006, will raise around 200 million euros per year by
taxing tickets by 1 to 40 euros. Although President Chirac
has stressed that the tax would not harm the competitiveness
of the French airline industry, Christian Blanc, center-
right deputy and former Air France Chairman, has criticized
the tax as "a very bad idea." The French air travel
industry has warned that the tax would result in a drop in
passenger numbers of one million per year, including a
600,000 passenger drop in domestic flights, which could
translate into 3,000 job losses. Jean-Cyril Spinetta, chief
executive of Air France-KLM, said it was not the right
approach, but it would not jeopardize the company's earnings
targets.

. . . Increased Individual Shareholding
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10. To encourage investment in stocks and thereby increase
corporate investment, the GOF introduced measures to lower
the capital gains tax. Shareholders will be partially
exempted from the 16% tax on capital gains on shares bought
in 2006 if they hold the shares until 2012. They will be
fully exempted if they hold the shares for eight years, or
until 2014. Nonetheless, shareholders will still have to
pay the "social contributions" due on capital gains (11% in
2005). CEOs of small and medium-sized companies (SMEs),who
decide to resign and cash in their shares, would benefit
from full exemption as soon as January 2006. The government
expects the sale of 50,000 to 70,000 companies each year in
the next five years, and is proposing to extend the scheme
of tax exemption to gains on the sales of farms and retail
trade businesses.

Tax Deductions to Improve France's "Attractiveness" . . .
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11. The revised 2005 budget also includes measures to
improve France's attractiveness (literally) by creating a
50% tax deduction on taxable profits for young artists, up
to 50,000 euros per year, from the sale of works of art.
The budget also seeks to improve the tax climate for senior
executives who move to France by exempting transfer bonuses
and some income from taxes. In a special effort to boost
exports, French citizens working more than 120 days abroad
and who boost French exports will benefit from full
exemption of income tax, effective January 1, 2006.

. . . and to Help Sectors Affected by Oil Price Increases
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12. Companies harmed by oil price increases because they
use trucks and buses will benefit from a reduction in
certain taxes. The reduction is increased if companies use
non-polluting vehicles. Partial repayment of tax on
petroleum products to farmers consuming diesel fuel could be
extended in 2005, on the basis of purchases of diesel made
after September 1, 2005.

Other Tax schemes
--------------

13. The revised 2005 budget also includes increased funding
for anti-fraud and anti-tax evasion activities, an increase
in the general taxes on pollution in various forms, and a
cut in corporate income taxes by large companies.


14. Deputies examined the revised CG budget from December 1
to December 8, and proposed 133 amendments. The deputies
insisted that the television ("redevance") tax surplus be
earmarked and dedicated to investment in the audiovisual
sector for antipiracy initiatives (among others),and not to
the CG budget. And it was the deputies who added the
provisions increasing income tax credits to favor French
expatriates promoting French exports. Senators will start
discussing the revised 2005 budget on December 19.

Budget Deficit Likely to exceed 3% of GDP in 2005
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15. In discussing the budget, Minister Breton reiterated,
"The budget deficit will be 3% of GDP." However, the
general government (GG) deficit is still heavily dependent
on the social security deficit. (The GG budget includes
central government, social security and local authorities).
Based on the Social Security Commission's estimates, the
social security deficit (including health insurance, family
allowances, work-related accidents and pensions) may
increase to 15.2 billion euros in 2005 from 12.2 billion in

2004. Despite transfers from the government, local
authorities fear they will be unable to balance their
budgets due to required additional social spending (similar
to "unfunded mandates" for state governments in the U.S.).


16. Citing "internal Finance Ministry sources" on September
30, the French newspaper Le Monde reported that the finance
ministry privately calculated the 2005 GG deficit at 3.3-
3.4% of GDP. Le Monde said that current trends for 2006
pointed to even wider deficits in the 3.5-3.6% range. In
its recent semi-annual outlook, the OECD and the European
Commission both forecast a general government deficit of
3.2% of GDP in 2005.

Comment
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17. Although Breton had indicated advance knowledge of the
contents of a government-commissioned report released
December 14 on the ballooning general government debt
(septel),the final 2005 central government budget appears
to lack any coherent strategy for addressing the debt or the
deficit. Although the report only called for a five-year
plan to seriously control spending growth, there is little
sign in this budget that the GOF feels compelled to take the
politically sensitive decisions needed to implement such a
plan.
STAPLETON