Wake-up call for France: Budget cuts needed

July 2, 2012 - 1:00 PM
Belgium Europe Financial Crisis

French President Francois Hollande gestures while speaking during a media conference at an EU Summit in Brussels on Friday, June 29, 2012. European leaders have agreed to use the continent's permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term. (AP Photo/Michel Euler)

PARIS (AP) — Welcome to reality, Monsieur Hollande. That's the message France's accounting watchdog sent to new President Francois Hollande with an audit Monday that says his Socialist government must cut up to €43 billion ($54 billion) in spending this year and next if it wants to meet its deficit targets.

The audit's findings, while roughly in line with economists' forecasts, are sobering for a man who rose to power decrying the budget-cutting juggernaut that has squeezed countries across Europe struggling with high debts.

"Austerity can no longer be inevitable!" he cried triumphantly when he won election May 6.

His prime minister, Jean-Marc Ayrault, sounded a more somber tone after the audit Monday, less than two months into Hollande's term. "Public spending will be brought under control," Ayrault said in a statement.

The governing Socialists note that former President Nicolas Sarkozy's conservative government ran up a state debt worth 90 percent of gross domestic product, and accuse Sarkozy's administration of underplaying France's economic weaknesses in the run-up to the presidential election.

The auditors also targeted Sarkozy's government, saying its efforts to trim spending were "belated" and that the biggest cuts will fall on Hollande's presidency.

Beyond the campaign rhetoric, Hollande is seen as pragmatic and has pledged to bring down government debt. Signs have been mounting that the government will have to cut back spending to do so.

The state statistics agency last week downgraded GDP growth forecasts for this year to just 0.4 percent, leaving the government little room for maneuver. And the audit released Monday had been expected to show a shortfall.

The French government must plug a hole of between €6 billion and €10 billion ($7.6 billion and $12.59 billion) in this year's budget to meet deficit reduction targets, the audit says. The audit by the Cour des comptes suggested that next year will be even tougher, with a €33 billion shortfall. And that's assuming 1 percent growth in 2013, far from guaranteed given the uncertainty of Europe's economic recovery.

Cour des comptes chief Didier Migaud said France needs an "unprecedented brake on spending."

The government is aiming for a deficit of 4.4 percent of GDP this year and a balanced budget in 2017. The auditors warned that France's deficit, equal to 5.2 percent of GDP in 2011, remains above the average in the 17-country eurozone and threatens France's credibility in financial markets.

"If we put off the necessary treatment, we risk being confronted with an even stronger treatment, in addition to the risk imposed by our creditors and our partners," they said.

Concerns about France's debt have flared up on occasion in the markets since well before Hollande was elected, since it is the eurozone's second-biggest economy and instrumental in European economic decisions.

The government is already planning tax hikes — including a 75-percent income tax on those earning more than €1 million a year, and new levies on banks and oil companies — in a revised budget being presented this week.

The Socialists say any eventual spending cuts and tax hikes will hit the rich the hardest and spare the poor, in keeping with Hollande's pledges to make France a fairer place. Tax cuts for the wealthy under Sarkozy's presidency — and his image as hobnobbing with the elite during the country's worst recession since World War II — alienated many voters, contributing to his election defeat.

Conservatives argue the Socialists' tax measures will further cripple France's economic competitiveness and explode the growing foreign trade deficit.

Conservative legislator Gilles Carrez, head of the parliamentary finance commission, defended the Sarkozy administration's financial efforts and criticized the Socialists for lowering the retirement age to 60 for some workers and raising the minimum wage.

"That will make it all the more difficult" to balance the budget, he said on RTL radio. He said Monday's audit means the Socialists "understand now that the crisis is here, and all countries of Europe are obliged to tighten the bolts, there are efforts to be made."

He suggested not replacing one in three public servants who retire or quit, and freezing public salaries.

The auditors proposed cutting jobs in France's large civil service, on both a national and local level, and ending tax breaks and loopholes.

Hollande has promised 60,000 new education jobs after many were cut under Sarkozy. But Hollande said he will make up for each new teaching job by cutting another government job elsewhere.

The audit comes days after Hollande helped push through a €120 billion growth package at European Union talks in Brussels. Hollande insisted that an earlier European pact on budget-cutting across the eurozone was hurting workers too much and urged government stimulus to boost growth.

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Thibault Leroux in Paris contributed to this report.