TCS Daily

French Fried

By Jean Yves Naudet - October 21, 2003 12:00 AM

After weeks of getting only sketchy outlines, we now have a complete view of France's 2004 budget, which has been presented by the government before the Parliament. This budget is clearly out of control: public expenditures increase, deficits explode, promised tax decreases are window-dressing. When all is said and done, this budget is just drifting away, like the previous ones, without any response to the French economy's needs.


A budget is based primarily on economic hypotheses: given a constant tax rate, these help predict revenues. The growth estimate for 2003 (2.5 percent), used as the basis for that year's budget, was completely overvalued (the figure ended up being around 0.5 percent in reality). As a consequence, deficits are much greater than what was planned.


For 2004, the budget relies on a less ambitious GDP growth hypothesis: only 1.7 percent. But economists don't agree on this figure. On the one hand, some of them hope we will reach it -- buffeted by the American recovery. On the other hand some think this rate is overestimated because France has not initiated the required structural adjustments for a real recovery. In my opinion, for France the second scenario is more likely, with lower growth than expected, and a worsening of budget.


Taking a look at this budget, it's clear the government prides itself on controlling public expenses; indeed they don't increase faster than prices. But this means also that these public expenditures, at least in current euro, will increase by approximately 2 percent, to reach €278 billion. In order to reduce both deficits and taxes, spending cuts would have been necessary.


The heaviest public expenses, of course, are those related to officials' labor costs. The fact that 60,000 civil servants will soon be on retirement offers a real opportunity for reducing the number of officials, without any disturbance for those in position. The French government considered replacing only 1 out of 2 civil servants. It's a small goal, but at least a first step towards reducing public expenditures. But its final decision is quite different: some sectors are untouchable, the French government said -- in particular public education, which employs the majority of civil servants. As a result, only 4,561 fewer people are expected, out of a total of 2,224,257. That's a decrease of a mere 0.23 percent.


What about revenues? The government (mentioned on the Presidential Campaign Program) called for a 3 percent reduction in income tax. Two problems emerged: first, this cut is not deep enough to stimulate economic activity by entrepreneurs, workers, investors or savers. The marginal income tax rate will go down from 49.58 percent this year to 48.09 percent next year. To this figure, you must not forget to add the CSG (Contribution Sociale Généralisée) and the CRDS (Contribution au Remboursement de la Dette Sociale), both created to cover the Social Security deficit. So the real French marginal income tax is 58 percent. This rate is much higher than those of our principal economic partners, all around 40 percent.


The second problem is the fact that recent tax increases on tobacco and gas simply contradict the government message of tax cuts. If you take into account all the different levies -- for instance land taxes, which are not included in the state budget -- the total tax increase is twice the promised reduction (€6.6 billion compared to €3.05 billion).


Finally, what's new with the effort to balance the 2004 budget? From the government forecasts (which we now see are unrealistic), the deficit should reach €55.5 billions, which represents 3.8 percent of the GDP, the same as 2003. This lack of improvement irritates the European Commission, which is busy trying to penalize France for violating the terms of the single currency agreement.


Another important point: compared with the €278 billion in expenditures, €55.5 billion of deficit represents 20 percent of the total budget. No business or household could cope with such a debt. The only way to get out of this is to resort to a new loan issue, which will get the state debt up to 62.8 percent of the GDP. The accrued interests alone constitute the first item in the budget just after education and equivalent to defense.


Too much spending, too much taxes, too much deficits. This is not what France needs.


Jean Yves Naudet is a professor at the University of Aix en Provence and assistant director of Institute for Economic Studies-Europe in Paris.

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