France's new Socialist government must cut public sector jobs and force through eye-watering austerity measures next year to meet a key European deficit target, the national audit office said today in an in-depth report on public finances.
Economists have warned for months that faltering economic growth was gnawing a hole in state revenue, but president Francois Hollande kept the issue largely under wraps until he won presidential and parliamentary elections in May and June.
Having promised to steer clear of Greek-style austerity to rally voters, Mr Hollande risks angering the public, leftist allies and trade unions as he seeks what the audit office said should be €33 billion in savings next year.
That is equivalent to 3.3 per cent of government spending."2013 is a crucial year. The budgetary equation is going to be very hard, much harder than expected due to the worsening of the economic picture," Didier Migaud, head of the Court of Auditors, told a news conference. "It will require unprecedented cuts to public spending as well as increases in taxation."
If the government wants to have some room for manoeuvre on its salary policy it has to reduce the overall number of staff."
The quasi-judicial body responsible for overseeing public accounts said France needs to find €6-10 billion in extra budget savings this year and €33 billion next year or risk unnerving financial markets.
The government plans a series of tax rises on the wealthy and on companies to adjust the 2012 budget, but unpopular welfare and civil service job cuts are likely next year.
Those will be tough to explain to an electorate already fretting over a wave of looming private sector job cuts in the coming months and alarmed at the prospect of a squeeze on their generous welfare system.
Persistent economic gloom was a key reason why Mr Hollande defeated conservative Nicolas Sarkozy last month. Fears of more misery have already knocked seven points off the new president's approval rating to 51 per cent, one poll showed.
Mr Migaud is a former Socialist politician who was appointed by Mr Sarkozy, giving the audit office's recommendations bipartisan authority.
The auditor said it had not uncovered any new skeletons left by Mr Sarkozy's outgoing government but pointed to €1.2 to €2 billion of likely unfunded spending this year in areas like defence, agriculture and housing, saying this was normal.
The main obstacle to Mr Hollande's pledge to honour France's European Union deficit targets of 4.5 per cent of GDP this year and 3.0 per cent in 2013, the court said, was a revenue shortfall due to over optimistic assumptions on economic growth.
The crunch year for public finances would come in 2013, the auditors said, when the government must make the biggest step in deficit reduction in the face of weak growth, a persistent euro zone crisis and rising domestic anger over high unemployment."
Respecting the 2013 public finance target is particularly important for France's credibility with the euro zone gravely affected by a debt crisis," the report said.
Even if Paris meets this year's target, public debt is set to top 90 per cent of GDP, a level at which economists see a negative impact on growth.
"If the dynamic of public debt does not slow, the risk premium demanded by investors will raise debt servicing costs and limit still further the room for manoeuvre," it said.
Government sources say a revised 2012 budget, due before the cabinet on Wednesday, will include €7.5 billion in new taxes, including increases in wealth tax and a financial transactions tax.
Finance minister Pierre Moscovici said in a newspaper interview published today that the government will revise down official growth forecasts as it uses the audit to also prepare the 2013 budget, due in the autumn.
The Court of Auditors forecast 2012 growth at around 0.4 per cent, less than the 0.7 per cent assumption in the old budget, and 1.0 per cent for 2013, well shy of the previous government's 1.75 per cent forecast.
Mr Moscovici told Le Figaro he would base a 2012 corrective budget on a growth forecast of 0.4 per cent or less, and the 2013 plan on output expansion of 1.0 to 1.3 per cent.
"There are a few priority (government departments) like education, justice, security and the unemployment office, which will see their resources increase, but for the rest, we need to make savings," he told the newspaper.
Despite France's success in cutting the 2011 deficit to 5.2 per cent of GDP from 7.1 per cent in 2010, its finances remain worse than the euro zone average of 3.8 per cent. While Germany was starting to reduce its debt, France's was still climbing, draining the competitiveness of its economy, the court said.
France urgently needed to rein in one of the highest state spending levels in Europe, at 56 per cent of GDP.
"Budgetary adjustments should be aimed mainly at spending," the report said, noting that efficiency gains would allow this to be done without affecting the quality of services.
In the short term, the auditors accepted that tax rises were needed to avoid drastic spending cuts which would choke off a recovery. They recommended reductions to tax exemptions and a short-term increase in sales tax and the CSG welfare charge.
The court report did not take into account measures approved by the government since it took office in mid-May, including a 2 per cent rise in the minimum wage.
Its figures also did not include a recent EU decision on taxation of foreign investment funds, which could cost France up to €9 billion, nor the extra cost of France's share in a new €100 billion zone bailout for Spanish banks.
If the €33 billion next year were split evenly between spending reductions and new taxes, the government could find the €16.5 billion of expenditure savings by slowing state spending increases to the pace of inflation, the auditors said.
Prime minister Jean-Marc Ayrault, due to set out his legislative agenda to parliament tomorrow, has said the central government - which accounts for four-fifths of the deficit - would hold spending flat between 2013 and 2015.
Reuters
