France treads fine line on EU deficit-cutting targets

PARIS Tue Apr 22, 2014 7:14pm EDT

French Prime Minister Manuel Valls delivers a statement after the weekly cabinet meeting at the Elysee Palace in Paris, April 16, 2014. REUTERS/Philippe Wojazer

French Prime Minister Manuel Valls delivers a statement after the weekly cabinet meeting at the Elysee Palace in Paris, April 16, 2014.

Credit: Reuters/Philippe Wojazer

PARIS (Reuters) - France's government is to set out its roadmap to deficit reduction on Wednesday using optimistic growth forecasts considered risky by its own fiscal watchdog to show how it will meet European budget standards by the end of next year.

Europe's second-biggest economy is a laggard where recovery and public finances are concerned. It has already been granted a two-year extension on the original deadline to bring its deficit below the EU's treaty limit of 3 percent of gross domestic product (GDP).

Its partners fear it may miss the deadline again next year, and meanwhile its unpopular Socialist government is struggling to sell painful cuts to rebellious rank and file lawmakers.

New Prime Minister Manuel Valls has to try to bridge the gap between those positions. The government will raise the official deficit forecast for this year and next to 3.8 percent and 3.0 percent of gross domestic product (GDP) respectively, business daily Les Echos reported on its website, leaving no margin for error should growth fail to meet the projections.

Appointed in late March after the Socialists were drubbed in local elections, Valls promised in his first policy speech to give priority to kickstarting growth, fuelling concern that France might let the targets slip.

But after stern words from Brussels and Berlin, his government said it would stick to its commitments, unveiling the terms of a 50 billion euro ($69 billion) savings package that will freeze pensions and welfare benefits for a year and clamp down on public spending.

Valls is to present details of the package to parliament's finance committee before it is sent off to the European Commission, which polices member states' public finances.

Based on official growth forecasts that have been adjusted upwards to take the hoped-for impact of payroll tax cuts into account, the plan is expected to show France reaching the deficit-cutting target but along a slightly slower path.

The government is to raise its growth forecasts to 1.0 percent in 2014, 1.7 percent in 2015 and 2.25 in 2016, versus 0.9 percent, 1.7 percent and 2.0 percent previously, said the government's fiscal watchdog, the High Council of Public Finances, in a statement on its website ahead of the presentation.

"WEAKNESSES" AND "RISKS"

The new forecast for this year is "realistic" the council said, but it was less sure about the 2015 projection.

It called that "not out of reach," but added "the macroeconomic scenario presented by the government is composed of several weaknesses and is subject to different risks," being dependent on a rebound in household confidence and revenues from recently announced supply-side measures.

The council also described the 2016 and 2017 forecasts as "optimistic".

The 2014 and 2015 forecasts are well above those of a Reuters poll of economists last week, which showed growth at 0.8 percent this year and 1.2 percent next year, with France also missing its deficit-reduction target next year.

Successive French governments have a track record of basing budget plans on over-optimistic growth and revenue forecasts that lead to a higher deficit when growth falls short.

A new EU budget review procedure gives the Commission more power to challenge figures its own economists deem unrealistic and send a national budget plan back for redrafting.

Diplomats said that provided the French plan aims for a deficit below 3 percent next year, a lame-duck Commission in its last months in office would probably not want to challenge Paris ahead of the May 25 European Parliament election when anti-European far-right populists are forecast to make big gains.

In 2013, France missed its target of 4.1 percent and its deficit ended the year at 4.3 percent of GDP. Current official forecasts put the budget in balance by the end of Hollande's term in 2017, as he promised, but that goal may be jettisoned.

Some officials in Paris were hoping that Italy's new socialist prime minister, Matteo Renzi, would be an ally in bending the EU deficit targets. But Renzi, whose country is already under the 3 percent deficit limit, has decided to play by the rules, leaving France without a partner in transgression.

(Reporting by Nicholas Vinocur and Alexandria Sage; Writing by Andrew Callus; Editing by Paul Taylor and Eric Walsh)

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