Skip to main content

How credible is France's budget?

By Nina Dos Santos, CNN
updated 10:08 AM EDT, Mon October 1, 2012
French President Francois Hollande gives a press conference at the UN building on September 26,2012.
French President Francois Hollande gives a press conference at the UN building on September 26,2012.
  • 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

Editor's note: Nina dos Santos anchors World Business Today, which airs 0800am and 0100pm GMT and 1000am and 0300pm CET weekdays. You can follow her on Twitter.

London (CNN) -- 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."

Spain struggles to deal with austerity
Anger in Athens over austerity
Global economy: Spending vs. saving

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

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.

Part of complete coverage on
updated 3:43 PM EDT, Tue August 27, 2013
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."
updated 11:28 AM EDT, Wed September 4, 2013
The G20 is held in Russia but, amid disagreements over Syria, can anything be done? John Defterios investigates.
updated 11:02 AM EDT, Wed July 10, 2013
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.
updated 1:50 PM EDT, Fri June 7, 2013
The euro club has suffered major shockwaves but its newest member has emerged as an economic star. What;s behind Estonia's success?
updated 9:23 AM EDT, Wed May 29, 2013
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.
updated 9:26 AM EDT, Tue May 14, 2013
The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.
The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
updated 10:56 PM EDT, Sun May 26, 2013
Europe's competitiveness is threatened as manufacturing companies scrambling to find enough skilled engineers.
updated 11:02 AM EDT, Wed July 10, 2013
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.
updated 6:44 AM EDT, Thu May 2, 2013
As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
updated 8:10 AM EDT, Fri April 26, 2013
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."
updated 12:56 PM EDT, Thu April 25, 2013
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.
updated 9:55 AM EDT, Mon March 25, 2013
The financial uncertainty in Cyprus is generating images of long lines at ATM machines and anti-European Union protests.
updated 2:15 PM EDT, Mon March 25, 2013
Cyprus will "step up efforts in areas of fiscal consolidation." Where have we heard that before? Oh yes. Greece.
updated 9:39 PM EDT, Fri March 22, 2013
The Cyprus debt crisis is being felt by the banks but also by the people who work at them. Nick Paton Walsh reports.
updated 8:10 PM EDT, Thu March 21, 2013
CNN's Nick Paton Walsh reports on a Russian hotel maid caught up in Cyprus' financial crisis.
updated 12:08 PM EDT, Mon March 18, 2013
Never underestimate the capacity of the Eurozone to shoot itself in both feet, says CNN's Richard Quest.
updated 11:03 AM EST, Thu February 21, 2013
Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.