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France's Socialists prepare 2013 spending cuts
June 21, 2012 / 12:45 PM / 5 years ago

France's Socialists prepare 2013 spending cuts

* France needs to trim 30 bln euros from deficit

* Tax rises on rich clear way for austerity drive

* Cuts contrast with drive for growth pledge

By Catherine Bremer and Daniel Flynn

PARIS, June 21 (Reuters) - France’s Socialists plan unpopular welfare and civil service job cuts next year in an effort to trim up to 30 billion euros from the deficit, calculating that tax rises on the rich will convince the less well off to accept their share of the pain.

President Francois Hollande won election last month promising to rescue the nation’s finances and persuade a sceptical Germany that growth, not austerity, was the key to reviving the troubled euro zone’s economy.

Hollande considered delaying compliance with the European Union’s 3 percent deficit rule but is now resigned to meeting the 2013 target, officials say, to avoid unsettling jittery debt markets and alienating Berlin as he pushes for 120 billion euro zone stimulus package.

For 2012, Hollande believes he can rely mainly on tax increases to raise the 10 billion euros needed to cut the deficit below a target of 4.5 percent of gross domestic product.

But to meet the much tougher ceiling next year, Hollande will have to touch the sacred cow of state spending, the highest level in Europe at around 56 percent of GDP.

Prime Minister Jean-Marc Ayrault will outline the government’s strategy to parliament on July 3 but advisors say his deliberations are focused on cuts to the state health insurance scheme, local government and all but the core ministries of justice, education and the interior.

Citing a Budget Ministry source, Le Figaro newspaper reported on Thursday that staffing in non-priority ministries would be cut by 2.5 percent next year and running costs by 10 percent. The state could also slash subsidies in sectors like agriculture and the arts, it reported.

Labour Minister Michel Sapin said staff cuts in some ministries would be offset by hirings in priority areas such as education - Hollande has pledged to hire 60,000 new teachers over his five year term.

“There won’t be a overall reduction in the number of civil servants,” Sapin told Europe 1 radio, saying the government would disclose exact figures in the coming weeks.

A convincing win in Sunday’s parliamentary elections gave Hollande’s Socialists a free hand to adjust the 2012 budget and France’s three-year spending plan over the coming weeks. The government is widely expected to use an audit of the state’s finances in early July to justify spending cuts.

“Hollande’s advantage is that he has the legitimacy to push through a certain number of reforms,” said economist Elie Cohen, a member of an informal group that advises Hollande.

LEADING BY EXAMPLE

Since taking office in mid-May, Hollande has slashed his and his ministers’ salaries by 30 percent, shunned the presidential jet in favour of the train where possible and remained in his Paris apartment rather than moving into the Elysee Palace.

His more austere personal style - a sharp contrast with his predecessor Nicolas Sarkozy, who was popularly perceived as a defender of the rich - was symbolised by his promise to tax at 75 percent earnings of more than 1 million euros a year.

“He was smart to start by target ting the wealthy and by having the government set the example. Now he is going to start sounding some unpleasant truths and explaining that everybody will need to make an effort,” Cohen said.

Hollande’s finance team says this year’s budget targets can be met without resorting to the sort of painful austerity cuts seen in Greece or Spain.

Hollande plans for this year include an increase of corporation tax for large companies, a surcharge on energy and banking firms, higher inheritance and wealth taxes, and the abolition of a tax exemption on overtime.

However, reducing France’s deficit to 3 percent of GDP next year would mean the spending cuts and the new tax regime would have to generate 20-30 billion euros, depending on how much the economy grows.

The current official growth target of 1.7 percent for next year on which the previous government based its budget is considered wildly optimistic by most economists.

“Avoiding a budget overshoot this year and coming up with a budget that meets existing fiscal targets is crucial,” said BNP Paribas analyst Dominique Barbet. “We think it is doable. But changes are needed and we expect some tough budgetary tweaking.”

Hollande will need to persuade credit ratings agencies his budget-pruning is credible. Moody’s and Fitch have France on negative outlook after Standard & Poor’s made history by removing its triple-A rating on Europe’s No. 2 economy in January.

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