Cablegate: French Budget Deficit for 2005 Could Be 3% of Gdp,

This record is a partial extract of the original cable. The full text of the original cable is not available.

161045Z Sep 05

UNCLAS SECTION 01 OF 03 PARIS 006314

SIPDIS

PASS FEDERAL RESERVE
PASS CEA
STATE FOR EB and EUR/WE
TREASURY FOR DO/IM
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER
USDOC FOR 4212/MAC/EUR/OEURA

E.O. 12958: N/A
TAGS: EFIN ECON PGOV FR
SUBJECT: FRENCH BUDGET DEFICIT FOR 2005 COULD BE 3% of GDP,
THE LOWEST IN FOUR YEARS

Refs: (A) Paris 5936 (B) Paris 6311

1. SUMMARY. The GOF is confident its 2005 budget deficit
will be 3% of GDP. This would be the first time in four
years that the government complied with the EU stability and
growth pact limit. However, public debt (estimated at 66.2%
of GDP) considerably exceeds the EU limit of 60% of GDP.
Work has begun on the 2006 budget, which is also expected to
be tight. Funding new economic growth and unemployment
reduction policies will make it likely that France will
squeak by with another 3% deficit for 2006. END SUMMARY

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2005 Budget Deficit Could Stand at 3% of GDP
--------------------------------------------

2. On September 5, the government informed the European
Commission that the 2005 budget deficit would stand at 3% of
GDP, exactly the maximum permitted by the EU stability and
growth pact, which limits the general government (GG) budget
deficit to 3% of GDP. (GG includes central government,
social security system and money spent on and by local
authorities). The new forecast is based on GDP growth of
1.5-2.0% in 2005. This year, the Government had to revise
GDP growth from 2.5% to 2% and to 1.5-2% (ref A).

3. The government slightly revised its previous forecast of
a deficit of 2.9% of GDP in 2005. Nevertheless, the budget
effort is an improvement compared with deficit rates of 4.2%
of GDP in 2003 and 3.6% in 2004, making 2005 the first year
since 2001 that the government has complied with the EU
pact.

--------------------------------------------- --------------
Government Confident in its Estimate of 2005 Budget Deficit
--------------------------------------------- --------------

4. Recent data allowed the government to be confident about
its new 2005 budget deficit estimate. Budget Ministry
experts have said that, "tax receipts, notably the shortfall
in corporate income taxes and VAT receipts is likely to be 2
billion euros, not 4 billion euros as forecast in June."
Health spending has been actually growing at a lower pace
than in 2004.

5. In addition, current analysis shows that public debt
will grow to 66.2% of GDP in 2005, up from 64.7% in 2004.
This considerably exceeds the EU stability and growth pact
debt limit of 60% of GDP.

--------------------------------------------- ----------
Budget Minister Works on 2006 Central Government Budget
--------------------------------------------- ----------

6. In June, Prime Minister Dominique de Villepin said the
government will "keep the objective of no growth in spending
volume in the 2006 central government (CG) budget." He
added that there would be no growth in spending value -
"excluding wages" - but wages account for more than 40% of
spending. Therefore, taking into account a 1.8% inflation
rate forecast for 2006, CG budget spending could increase
4.9 billion euros compared with 2005. Villepin said that
this would provide more maneuvering room for government
priorities (employment, education, research, and security),
indicating that employment budget spending will increase
10%, education and research will "benefit from new means to
better achieve their missions," and "all ministries
participating in the reinforcement of security of our fellow
citizens will be fully staffed."

--------------------------------------------- -------
Recent Measures Narrows Government Room for Maneuver
--------------------------------------------- -------

7. New measures announced by Villepin in September will
significantly affect the government's maneuvering room.
Based on preliminary indications, measures would add at
least 4.5 billion in new spending, and a 10 billion euro
increase in public investment (ref B). The 2006 CG budget
will include details of the planned 2007 income tax reform
(including income tax cuts (ref B), which force budget
ministry staff that prepare the 2006 budget to anticipate
such cuts.

8. A contact in the Finance Ministry told us that de
Villepin has provided the general guidance for government
budget policy. Implementing those policies will affect the
2005, 2006 and 2007 budgets. Our contact emphasized that
budget ministry staff have to incorporate new measures in
the 2005 and 2006 budgets, but noted that "nothing is final;
not all the choices ("arbitrages") have been made." The
Budget Ministry staff must finalize the 2006 CG budget by
September 28, not September 21 as originally expected. Our
contact said that the 2006 budget process was late mainly
due to the 2005 appointment of the new Prime Minister, not
to mention the new finance minister.

--------------------------------------------- --------------
Suspicion Grows that Budget Deficit Could Stay at 3% of GDP
in 2006
--------------------------------------------- --------------

9. According to the economic newspaper Les Echos, the
government is likely to revise its 2006 budget deficit
target to 3% of GDP from 2.7%. The 2006 GG budget cannot
benefit from an exceptional EDF one-time payment related to
the transfer of pension payments to the government, which
are going to help reduce the 2005 GG budget deficit by 0.5%
of GDP. In a recent report, the European Central Bank noted
that five EU excessive deficit countries, including France,
would again come very close to or exceed the 3% of GDP limit
in 2006, saying that France has pursued a "minimalist fiscal
strategy." The government did not make any comment on a
revision of its 2006 budget deficit objective.

--------------------------------------------- ---
Finance Minister Calls Budget Deficit an Illness
--------------------------------------------- ---

10. Nonetheless, Finance Minister Thierry Breton, in a
summer meeting of the ruling party UMP, said that "the
budget deficit is a French illness" and "public debt is
running at an unacceptable level." Breton is planning to
reinforce public spending controls over the next two years
and remarked "the reality is that French people's taxes in
2006 will only just about cover interest payments on our
debt. We have to say it plainly - for the last 27 years we
have been living on credit . . . we have to get our budget
deficit below 3% of GDP, not because Brussels tells us to
but because it is good management." He confirmed that, over
the 20-month period before France's next presidential
election in 2007, the government planned to step up reforms
to boost economic growth.

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Health Insurance Deficit is Decreasing
--------------------------------------

11. Based on recent information, the 2004 health insurance
budget deficit was lower than expected - 11.6 billion euros
versus an initial estimate of 13.2 billion euros. The
improvement over the initial estimate was due to both a
lower rate of spending growth, and a higher-than-expected
increase in receipts (payroll tax receipts, and general
income tax contribution - "Contribution Sociale Generalisee
- CSG"). The government objective for 2005 is to reduce the
health insurance deficit to 8 billion euros, and to
eliminate it by the end of 2007. However, in a recent
report, the public accounts oversight institution "Cour des
Comptes" said it had doubts about whether the GOF can
balance its health insurance accounts in 2007. The
institution urged the health insurance system to tighten
spending controls, such as by fixing doctors' compensation.

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Comment
-------

12. Breton's observation about tax receipts just covering
interest payments of the public debt, and the need to
accommodate the succession of policy changes relayed to the
Budget Ministry, ensure that staff will have a hard time
once again in preparing the central government budget. The
problem is how to fund priorities, cut spending in non-
priority areas to reduce the budget deficit, and permit a
decrease in revenue from income tax cuts in 2007. Future
privatization receipts (most of which are already planned to
reduce public debt) and receipts derived from economic
growth may not be sufficient. It is encouraging that the
GOF appears to be taking seriously the EU stability pact
target of 3% for both the 2005 and 2006 budget deficits.
However, despite De Villepin's promise of greater
maneuvering room for GOF priorities, the budget process
appears destined to inexorably tighten the straight-jacket
that the GOF social-economic model has become. The
impending 2007 presidential election makes it even more
unlikely that the GOF will take a gamble with its popularity
to implement reforms needed to ensure durable economic
growth.
STAPELTON#

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