French budget is a disappointment

French budget is a disappointment

France’s new budget for 2015 is worrying and a little disappointing. It was presented by Finance Minister Michel Sapin on Wednesday, October 1, who said ‘France took its responsibilities’. That assessment is probably presumptuous, writes Dr Emmanuel Martin.

The government is moving towards reducing public spending and taxes after years of growth-killing austerity based on tax increases. This is a good move, but there is still a long way to go.

Stopping the first level of income tax will enable nearly three million households to avoid income tax altogether. Yet other taxes and contributions will be raised to compensate such as those on diesel fuel for cars or the contribution to the public electricity service. Overall taxes and contributions should decrease slightly from 44.7 to 44.6 per cent of GDP.

Some 21 million euros of ‘economies’ are planned for 2015, as part of a 50 billion euros savings package between 2015 - 2017.

But you have to be careful with words. In modern political parlance, ‘spending cuts’ essentially mean ‘lower growth’ in spending - not real spending cuts.

Today’s French spending cuts mean that global public spending will continue to rise, though at a lower rate - plus 1.1 per cent in value. The only real reduction in spending will be central government, which will see its spending cut for the first time by 1.8 billion euros.

Many commentators are complaining that the 21 billion euros of economies remain largely vague and ill-defined.

The slow down in French spending is probably unprecedented. Yet, with public spending at 57 per cent of GDP as France’s official sovereign debt reaches an alarming two trillion euros - it has doubled in 10 years - more was expected.

This is especially true after its commitment to a three per cent of GDP deficit target had been postponed for a third time. Everyone in Europe knows the French deficit target will not be met until 2017.

It would have been good therefore to concentrate on serious spending cuts. This is what really matters for the fiscal trend. And from this perspective, the planned budget is quite disappointing.

The proposed spending cuts amount to a few economies here and there but no structural reform of the administration. This is a bookkeeper’s budget.

What France needs today is innovation in producing public services - it needs to change its model. This requires profound thought on how to make government dramatically more efficient. And it implies a clear and specialised redistribution of missions among the various redundant layers of administration including outsourcing roles to the competitive sector, a clean-up among the costly 1,200 public agencies and more innovation to ensure the French public get value for money.

The budget is - as usual - based on a highly optimistic assumption of economic growth as the High Council on Public Spending has been quick to point out. An assumption of one per cent growth in 2015 with a slow-down in public spending and a reduced private sector, is indeed very debatable.

France’s credibility remains problematic, despite a slight move in the right direction.

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