How credible is France's budget?

French President Francois Hollande gives a press conference at the UN building on September 26,2012.

Story highlights

  • France has unveiled its most austere budget in 30 years
  • It aims to trim the deficit to 3% of gross domestic product
  • The economies will be achieved via cuts and tax hikes
  • Some believe the French government's plans are unrealistic

A day after Spain presented its financial prescription for next year, France unveiled what is being dubbed its "toughest budget in 30 years."

Maintaining its aim to trim the deficit to 3% of gross domestic product, the government of President Francois Hollande announced 30 billion euros in savings ($37 billion) by 2013.

As was widely expected, the economies will be achieved via a combination of cuts and tax hikes, with 10 billion euros being raised through cuts to the state and a further 20 billion euros generated through increased taxation of households and companies.

Speaking to reporters after signing off on the plan, the French Prime Minister Jean-Marc Ayrault called France's 3% objective "realistic" and "achievable."

Some economists, however, would beg to disagree. Here's why.

Spain struggles to deal with austerity
Spain struggles to deal with austerity

    JUST WATCHED

    Spain struggles to deal with austerity

MUST WATCH

Spain struggles to deal with austerity 03:34
Anger in Athens over austerity
Anger in Athens over austerity

    JUST WATCHED

    Anger in Athens over austerity

MUST WATCH

Anger in Athens over austerity 02:22
Global economy: Spending vs. saving
Global economy: Spending vs. saving

    JUST WATCHED

    Global economy: Spending vs. saving

MUST WATCH

Global economy: Spending vs. saving 04:41

France's economy has been stagnant over the last couple of quarters while some of its largest trading partners are already seeing theirs contracting.

Yet the country's new budget is based on the assumption that France's output will expand 0.8% in 2013 and 2% between 2014 and 2017.

Jurgen Michels and his team of economists at Citigroup are among those who reckon such predictions are overly optimistic.

''A review of the budgets presented since 2005 reveals that the government has had a bias of over-optimism when it comes to forecasting growth in the following year,'' the team wrote in a note sent to clients a week before the budget's release.

Citi predicts a more sluggish economy for France in 2013 will likely cause the nation to miss its 3% target by 0.7%.

In fact, to bring France's deficit back into line with the official limits, Citi's economists think France would need to save another 18 billion euros more than the 30 billion announced Friday, to compensate for weaker growth.

Yet the real problem with France's budget isn't just that it ignores the bleak outlook, it's that it relies too heavily on revenue generation via increased taxes.

And we all know the effect such levies can have on curtailing growth.

Speaking to the France 2 television station, the evening before the budget's publication, Ayrault reminded viewers the country could not afford to abandon its targets, lest its borrowing costs soar and gobble up any savings made.

He also stressed the higher taxes would only affect one in 10 households.

But plans to tax the wealthiest citizens earning over a million euros a year at 75% will no doubt cause the richest, and sometimes most entrepreneurial, French men and women to consider their options abroad.

Despite Ayrault's pledge to average families, Citi expects an increase in precautionary savings, as consumer sentiment stays at record lows and unemployment continues to tick higher.

At the same time the sharp increase in taxation for some of France's biggest firms is hardly likely to encourage job creation.

France's 2013 budget was the most important event of the year for a new administration keen to prove its credibility to the markets.

So far, its predictions look naively rosy.

      Europe's financial crisis

    • German Chancellor Angela Merkel talks with Finance Minister Wolfgang Schaeuble during a session at the Bundestag (lower house of parliament) on June 25, 2013 in Berlin.

      Schaeuble: 'Don't see' bailouts

      German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
    • IBIZA, SPAIN - AUGUST 21:  A man dives into the sea in Cala Salada beach on August 21, 2013 in Ibiza, Spain. The small island of Ibiza lies within the Balearics islands, off the coast of Spain. For many years Ibiza has had a reputation as a party destination. Each year thousands of young people gather to enjoy not only the hot weather and the beaches but also the array of clubs with international DJ's playing to vast audiences. Ibiza has also gained a reputation for drugs and concerns are now growing that the taking and trafficking of drugs is spiralling out of control.  (Photo by David Ramos/Getty Images)

      Spain keeps partying

      Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
    • The Euro logo is seen in front of the European Central bank ECB prior to the press conference following the meeting of the Governing Council in Frankfurt/Main, Germany, on April 4, 2013.

      OECD: Slow recovery for Europe

      The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
    • The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.

      Europe's new threat: Slow decay

      The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
    • Packed beaches and Brit pubs? Not necessarily. Here's what drew travelers to one of Spain's most beautiful regions in the first place

      Spain aims for big tourist summer

      Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
    • Photographer TTeixeira captured these images from a May Day protest in Porto, Portugal, Wednesday by demonstrators angered by economic austerity measures. "People protested with great order, but showed discontent against the government who they blame for this economic crisis," she said. "They want the government to resign and the Troika [European Commission, International Monetary Fund and European Central Bank] out of this country."

      May Day protesters flood Europe

      As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
    • Croatian Prime Minister Zoran Milanovic delivers a speech in Mostar, on April 9, 2013. Prime Ministers from Bosnia's neighboring countries arrived in Bosnia with their delegations to attend the opening ceremony of "Mostar 2013 Trade Fair".

      Croatia PM: We need Italy to recover

      As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
    • Anti-eviction activists and members of the Platform for Mortgage Victims (PAH) take part in a protest against the government's eviction laws in front of the Popular Party (PP) headquarters in Mallorca on April 23, 2013.

      Spain's unemployment hits record

      Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
    • People protest against the Spanish laws on house evictions outside the Spanish parliament on February 12, 2013 in Madrid, Spain.

      Welcome to Madrid: City of protests

      Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.