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03 Jul 2012 10:30
President Francois Hollande must find up to €100-billion if the eurozone's second biggest economy, France, is to meet deficit-reduction targets. (AP)
Hollande, Europe's chief critic of one-size-fits-all austerity measures, is facing the headache of inescapable belt-tightening at home after a national audit confirmed that France has a gaping hole in its budget and will struggle to meet its deficit-reduction targets.
France must plug a gap of between €6-billion and €10-billion in this year's budget to meet its promises to Brussels to reduce the deficit to 4.4% of economic output, state auditors warned.
Next year will be even harder with a €33-billion shortfall complicating Paris's pledge to reduce the budget deficit to 3% of GDP in 2013.
The dire state of public finances in the eurozone's second economy comes as no surprise.
France has record unemployment at about 10%, public debt has spiralled, growth is flat, competitiveness is low, the credit rating has already been downgraded and French industry has declined faster than its neighbours'.
The new Socialist president and his government must now begin a delicate verbal juggling act to define belt-tightening measures in a country where the word "austerity" is taboo.
Hollande, who declared in his presidential victory speech that "austerity can no longer be inevitable," reiterated recently in Rome that he was against austerity. But at the same time he has maintained that his target of balancing the books in France by 2017 is sacrosanct.
The anti-austerity rhetoric of the election campaign now comes up against France's economic reality.
France hasn't balanced a budget since 1974 and must steadily reduce its deficit to keep Brussels and the markets at bay.
Hollande's line, expected to be set out in a speech to Parliament by the prime minister, Jean-Marc Ayrault, on Tuesday, is that restoring French public finances is not about crude, axe-swinging cuts to the public sector or welfare system but a "fair effort".
Socialists have argued in recent days that the left will deliver a "just" budgetary discipline which they say is not ideological or punitive like that of the right, and which is also a short-term measure.
Above all, they want to preserve France's social model of welfare rights.
The word austerity is unlikely to be mentioned, as the government insists instead on speaking cryptically of "fairly redressing" the nation's finances.
Details of this year's revised budget will emerge this week, featuring Hollande's tax increases, mainly aimed at the wealthiest and most privileged.
These include an increase in France's wealth tax, new levies on banks and company dividends.
Hollande has pledged to primarily target the rich and big companies with tax increases in order not to sap consumer spending. But the French media warned it was impossible for French people not to feel the burn amid tough economic realities over the coming year.
A poll on Friday showed 54% of French people thought the new taxes would fall mostly on the lower middle class, already struggling with their own budgets.
The state auditor, who failed to lay the blame for France's economic gloom at the door of the last right-wing government, said tax rises must be balanced with a closer look at public spending.
It recommended the government consider tough decisions over how to trim the fat off the public sector, at 56% of GDP the eurozone's biggest.
Proposals included cutting jobs in the 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 the government has said it will make up for each new teaching job by cutting another government job elsewhere.
With a plan to trim running costs and the non-replacement of a percentage of civil servants who retire, some government departments could end up facing harsher staff cuts than under Sarkozy.
It remains unclear whether France's health system, pensions and family benefits will also become targets for streamlining.
Ahead of the revised budget, the finance minister, Pierre Moscovici, lowered economic growth forecasts from a projected 1.7% in 2013 to between 1% and 1.3%. – © Guardian News and Media 2012
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