France needs reform to keep strained finances on track -OECD

PARIS Tue Nov 27, 2012 5:00am EST

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PARIS Nov 27 (Reuters) - France will miss its public deficit goal next year as the economy struggles to gain traction, the OECD said on Tuesday, urging structural reforms and spending cuts to lift confidence and growth.

In its latest economic outlook, the Organisation for Economic Cooperation and Development said the budget gap would shrink to just 3.4 percent of gross domestic product in 2013, missing the government's stated target of 3.0 percent of GDP.

The Paris-based think-tank said President Francois Hollande had raised his credibility by committing to fiscal discipline, but that his forecast of 0.8 percent growth next year is too optimistic and more is needed to keep public finances on track.

The OECD slashed its growth estimate to 0.3 percent for 2013, from 1.2 percent in its May outlook, and said GDP would expand a moderate 1.3 percent in 2014, also lower than the government's predicted 2.0 percent.

"France must ... launch a comprehensive medium-term strategy of fiscal consolidation, spending cuts and structural reforms to boost confidence and raise competitiveness and growth," the OECD said in its report.

The euro zone debt crisis has hammered France's 1.9 trillion euro economy, exacerbating existing weaknesses in industrial competitiveness and bringing economic growth to a halt.

Hollande this month unveiled a package of measures, including tax credits and financing guarantees for companies, in a bid to stem rising job losses and kick-start the economy.

But his "Competitiveness Pact" has drawn criticism from economists for shying away from deep-reaching structural reforms and introducing measures that will mainly take effect in 2014.

Moody's downgrade last week of France's Aaa credit rating highlighted the uncertain fiscal outlook and flagging economy, leading employers to call for more extensive structural reforms.

Hollande's government has pledged to submit reforms to rigid labour laws to parliament at the start of next year, but talks between unions and employers so far have been fraught.

"Implementing broad structural reforms covering education and product and labour markets would help maintain confidence and strengthen France's economic prospects," the OECD said.

The think-tank also stressed that deficit-cutting plans had placed too much emphasis on tax hikes, especially for companies and wealthier segments of society, and ultimately, more belt-tightening would be on the cards.

"Although tax increases might be easier to implement and less prone to social turmoil that might unnerve financial markets, ultimately public spending must be curbed," the report said.

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