France unveils slashed 2012 budget

France proudly presented next year’s budget today as the first to cut spending since the Second World War, as it tries to convince nervous investors that it will get its debts under control.

But economists baulked at the claim and said the cuts in the 2012 budget are not substantial enough to meet deficit targets laid out by the government – or to reduce the country’s debt load.

France has not balanced its budget in three decades and for years flouted EU rules which require members to keep their deficits under 3% of GDP.

Paris was not alone in ignoring the spending rules, and the result has nearly brought the eurozone to its knees: Ireland, Portugal and Greece have all needed bailouts to pay their bills after investors refused to lend to them, and Italy and Spain have seen their borrowing costs skyrocket.

France’s own bond yields – the interest rate investors demand to lend a country money – rose this summer amid fears that its debts were too high.

In response, the government unveiled a series of measures – mostly new taxes - which were reiterated in today’s budget. Among other measures, it plans to increase taxes on the wealthy, levy a tax on sugary drinks and close loopholes.

It also promised to cut around 30,400 public jobs next year by not replacing one in two posts vacated by people retiring.

“Public debt reduction is a priority. It happens by first reducing the public deficit,” a statement from the Budget Ministry said.

Budget Minister Valerie Pecresse told her colleagues today that – including the austerity measures – next year’s deficit should fall to €80.8bn – nearly €15bn smaller than this year’s.

“It’s a historic moment: For the first time since 1945, public expenditures year-on-year will go down,” Ms Pecresse told today’s Cabinet meeting.

But economists said that, while that claim may be true on paper, next year’s spending was almost certainly going to outstrip this year’s.

“Every budget predicts a stabilisation of spending... and we see after the fact that these goals are never met,” said Nicolas Bouzou, an economist with consulting firm Asteres.

He said that to really reduce the budget would take a rethinking of the role of the state, especially in terms of healthcare and retirement benefits.

Frederic Bonnevay, an economics expert associated with the Institut Montaigne think-tank, called the budget a “guerrilla strategy rather than full battle plan” to tackle the problem of public indebtedness.

Next year, President Nicolas Sarkozy faces re-election, making the budget debate a particularly thorny one – and today’s presentation focused much more on tax increases than the cuts. In a country where citizens expect a lot from their government, new taxes are typically easier to swallow.

But Mr Sarkozy has staked his reputation on meeting deficit reduction targets, promising to bring it from 7.1% of GDP last year to 4.5% next year and 3% – the EU limit – in 2013. Further reductions were laid out, all the way down to 1% in 2015.

The ministry said its goals were built around an expectation of 1.75% growth in GDP in 2012 – an estimate it had to slash earlier this year.

The global slowdown has made it increasingly difficult for countries to balance their budgets as weak growth means less money pouring in.

But the government said that the reduced level of growth was attainable – and even indicated it represented an abundance of caution.

Finance Minister Francois Baroin promised that the new budget would both slash spending and help boost growth.

“This budget plan is in line with our policy: It marries a reduction in the deficit, a managing of spending, and a support for (economic) activity,” he told reporters.

The opposition Socialist Party denounced it and said that, if given the chance, its leaders would restore progressiveness and justice to taxes.