France’s Hollande may roll back spending promises
PARIS, May 9 — France’s Socialist president-elect Francois Hollande may use a summer audit of state finances to water down his generous campaign promises rather than risk a backlash from financial markets against stubbornly high deficits and rising debt.
Advisers say he could even freeze some spending if the review turns up any nasty surprises, soothing investors who are worried he has become the figurehead for a fight against German-imposed austerity in the euro zone.
Hollande, due to take office next week after toppling President Nicolas Sarkozy in Sunday’s election, dismayed analysts with his campaign spending promises, such as hiring 60,000 school staff and creating 150,000 state-aided jobs.
President-elect Hollande waves at his campaign headquarters in Paris. — Reuters picFrance already has one of the highest levels of public spending in Western Europe, at around 55 per cent of gross domestic product, and has not balanced its budget since 1974.
But Hollande, a 57-year-old graduate of France’s elite ENA civil service school, together with other Socialist leaders has already been discreetly preparing the ground to play a more cautious game.
“There are certainly deficits, things hidden in the shadows,” Jean-Marc Ayrault, the Socialists’ parliamentary leader and a candidate for prime minister, said of the audit.
“We will discover the reality and strike a balance between fostering growth and making the necessary efforts to reduce the debt.”
Those close to Hollande are now urging him to use the review by the country’s top audit body, the Cour des comptes, as justification for lowering his growth forecasts for the euro zone’s No. 2 economy, widely seen as too optimistic.
Advisers are pressing him to pare back spending in certain areas, particularly the deficit-ridden social security system, and to raise taxes by eliminating widespread exemptions and raising the CSG welfare charge on income and capital revenues.
“There are holes in the programme on the spending side and we will be obliged to take action,” said one long-standing adviser, who asked not to be identified.
Window of opportunity
The situation is delicate for Hollande after he promised change to voters tired of unemployment running at 12-year high of nearly 10 per cent, and talk of spending cuts.
Sarkozy, despite his tough rhetoric, took only tentative steps to putting France’s finances on an even keel and the country was stripped of its prized triple-A credit rating by Standard & Poor’s on his watch.
In a strongly-worded report in February likely to presage its summer findings, the court, a quasi-judicial body, said at the current pace it would take 10 years to eliminate the deficit, which ended last year at 5.2 per cent of GDP. It said public debt was approaching a “danger zone” of 90 per cent of GDP.
With markets edgy, the Socialists will have to be careful how they manage the court’s report. In February, Spain’s new conservative government sent shockwaves through euro zone markets after it uncovered a worse than expected deficit of 8.5 per cent of GDP from its Socialist predecessor.
“It will certainly not be on that scale but the Court of Audit always finds some bad surprises,” Jerome Cahuzac, the Socialist head of the National Assembly finance committee and a possible candidate for budget minister, told Reuters.
Aware of the political risk of angering left-wing voters, Hollande’s advisers say he must act within two months of taking office on May 15, allowing the Socialists to point the finger at Sarkozy’s outgoing government.
Any announcement would likely be after June 10 and 17 parliamentary elections, essential for Hollande to gain a working majority for legislation.
“We have a window of opportunity, but it has to be done quickly,” said a second Hollande adviser.
Union ties
Some economists have warned that the election of a tax-and-spend Socialist, with no agenda for much-needed structural reform in France, could plunge the heart of the euro zone into disarray as the situation deteriorates in Spain and Greece.
There are certainly deficits, things hidden in the shadows . . . We will discover the reality and strike a balance between fostering growth and making the necessary efforts to reduce the debt.” — Jean-Marc Ayrault, the Socialists’ parliamentary leader, candidate for prime minister
But Socialist heavyweights have emphasised they will be fiscally responsible, as well as planning reforms to improve France’s flagging competitiveness — though these do not include the German-style wage restraint that Sarkozy advocated.
“No one can expect us to arrive and give everyone handouts. That is not the reality of the situation,” said Michel Sapin, who oversaw Hollande’s programme and is tipped as a future finance minister. “Joy... gives way very, very quickly to responsibility.”
The Socialists say research and innovation, production quality, speed and flexibility are more important than cutting wages, which could hurt domestic consumption.
While Sarkozy clashed head on with France’s powerful unions, the Socialists’ closer ties with them — particularly the moderate CFDT — may allow them to accomplish bolder reforms.
Hollande wants a deal on an overhaul of the retirement system at a conference with unions in the autumn, to put the loss-making system permanently in the black. Socialists say this could vastly improve state finances with no short-term negative impact on growth.
In the meantime, financial markets — jittery after Greece’s weekend elections cast its future in the euro zone into doubt — will impose a financial corset on the Socialists.
With debt forecast to peak at nearly 90 per cent of GDP next year, France is already paying out around 2.5 per cent of GDP in interest payments, even with interest rates at record lows. This would spike much higher if the markets lost faith in France.
Growth too optimistic
To keep his promise to balance the budget by 2017, Hollande wants to find €100 billion (RM395 billion): half from new revenues and half from limiting growth in public spending to 1.1 per cent per year — a small cut once inflation is taken into account.
But his plans are based on optimistic growth assumptions of 1.7 per cent of GDP next year, rising to an average 2.5 per cent after 2013. France’s trend growth rate for the past 20 years has been 1.6 per cent, and economists expect that to dip to 0.9 per cent this year.
“The Court (of Audit) is not going to find any big holes in government finances because national accounting in France is very serious, but the problem will be the growth: the forecasts are too optimistic,” said the second adviser.
Going on past form, the court will recommend a mix of tax rises and spending cuts to plug the deficit. It has also said the social security system deficit was unprecedented in Europe and must be cut by trimming spending.
Such considerations may influence an extraordinary session of parliament in July that Hollande is due to convene to pass a revised 2012 budget and a medium-term spending plan.
The month-long session is scheduled to pass legislation ending several tax exemptions, imposing tax surcharges on banks and oil companies, approving a top tax rate of 75 per cent for the wealthy and quashing a social VAT introduced by Sarkozy. — Reuters
