US embassy cable - 05PARIS1456

UNCLAS SECTION 01 OF 03 PARIS 001456 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, FR 
SUBJECT: FRENCH BUDGET DEFICIT AT 3.7-3.8 PERCENT OF GDP IN 
2004 
 
REF:  PARIS 001050 
 
1. SUMMARY.  The 2004 overall budget deficit for France is 
reported to be 3.7% of GDP.  The deterioration over the 
expected 3.6% deficit is mainly due to a rise in social 
security expenditures, notably health insurance.  France's 
public debt amounted to 65.6% of GDP in 2004, also exceeding 
the 60% limit.  Nevertheless, the European Commissioner for 
Economic Affairs expressed confidence in France's commitment 
to reduce its budget deficit to 2.9% of GDP in 2005.  New 
Finance Minister Thierry Breton has the power to tackle 
central government expenditure growth, but he has little 
influence over social security expenditures, a much more 
delicate problem to handle.  Reducing the budget deficit and 
the public debt will depend on the success of the GOF 
program to boost economic growth and employment, while being 
mindful of opposition politicians' and unions' rejection of 
reforms.  END SUMMARY. 
 
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Overall Budget Deficit Accounts for 3.7% of GDP . . . 
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2.  As expected, the National and Statistical Agency INSEE 
provided its 2004 budget estimates to the European 
Commission on March 1.  INSEE revised the 2004 overall 
budget deficit upward (based on Maastricht definitions) to 
3.7% of GDP or 59.8 billion euros compared to an initial 
estimate of 3.6%.  Although this is an improvement over the 
4.2% registered in 2003 (revised from 4.1%), it confirms 
that the budget deficit is significantly higher than the 3% 
European stability and growth pact limit. 
 
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. . . mainly due to a Deterioration in Social Security 
Deficit 
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3.  Based on a national income accounts basis, the overall 
budget deficit amounted to 60.3 billion euros: 
-The social security deficit more than tripled in two years, 
increasing to 13.8 billion euros, notably due to a 4.8% 
increase in health insurance expenditures. 
-Also bad, for the first time in ten years, local 
authorities' budget posted a deficit (2.2 billion euros).  - 
On the positive side, the central government excluding 
miscellaneous administrative units (CG) budget deficit was 
lower than expected, decreasing to 51.5 billion euros from 
62.3 billion euros in 2003. 
 
4.  INSEE's budget estimates for 2004 include a 1.6 billion 
euro one-time payment made by EDF and COGEMA to CEA for the 
dismantling of the Marcoule nuclear site.  If the European 
Statistical Office Eurostat refuses to take this payment 
into account as a budget receipt, the French budget deficit 
would be as high as 3.8% of GDP. 
 
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Public Debt Much too High 
------------------------- 
 
5.  Public debt continues to significantly exceed the 60% 
Stability and Growth Pact limit, with public debt amounting 
to 1,065.4 billion euros or to 65.6% of GDP.  The GOF missed 
its goal of reducing public debt to 64.8% of GDP in 2004. 
Finance ministry specialists argued that the CG, the social 
security fund (ACOSS), and the fund in charge of the social 
security debt management (CADES) overestimated their 
financial needs, over-issuing securities in 2004.  The debt 
figure also includes acquisitions of private securities by 
the Retirement Reserve Fund ("Fonds de Reserve des 
Retraites") and complementary retirement funds AGIR-ARRCO. 
 
6.  The increase in the public debt contributed to the 
fuelling of budget expenditures in 2004 by generating 47.2 
billion euros in interest payments.  Reducing the debt 
service (repayments of funds and interest payments) requires 
cutting the overall budget deficit to 2.5% of GDP. 
 
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GOF Sticks to its 2.9% Budget Deficit Objective for 2005 
--------------------------------------------- ----------- 
 
7.  New Finance Minister Thierry Breton indicated in his 
first speech as minister before deputies that he would 
continue to pursue policy set out by his predecessors, 
notably Gaymard (ref), confirming that reducing the budget 
deficit was a priority.  Reacting to the INSEE's budget 
figures, he stated on March 2 that he would be 
"uncompromisingly tough" on public spending control in order 
to have more freedom to maneuver on employment, the 
purchasing power of the French, economic growth and 
innovation.  "We don't have a minute to lose," he added. 
Budget Minister Jean-Francois Cope echoed his words by 
adding "I will be, with Thierry Breton, particularly 
attentive to keeping a tight lid on budget spending growth." 
 
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New Finance Minister Has to Face Opposition Politicians and 
Unions 
--------------------------------------------- -------------- 
 
8.  Opposition politicians have already protested that a 
bumper season of corporate earnings from French companies 
has not been used to create jobs.  Both the exceptional 
profits made by companies in 2004, and the increase in the 
unemployment rate to 10% percent in January, its highest 
level in five years, have made newspaper headlines.  Breton 
called the unemployment rate "unacceptable," saying "France 
is not a company, but it has advantages; I have to set them 
to music... We have to restore businessmen and employees' 
desire to fight." 
 
9.  Leftist unions CGT and FO called on all employees in the 
private and public sectors to strike on March 10, also 
asking the unemployed and retirees to join demonstrations 
and locally organized meetings.  Unions intend to protest 
against low wage increases, the reform of the 35-hour 
workweek, and the lack of job creation.  A CGT 
representative emphasized that this national strike day was 
planned many weeks ago, and it became inter-sector and inter- 
union due to "the autism of the GOF, the business 
organization MEDEF, and many leaderships." 
 
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The European Commission Still Shows Confidence in GOF's 
Capacity to Reduce Budget Deficit 
--------------------------------------------- ---------- 
 
10.  On March 2, Amelia Torres speaking for European 
Commissioner for Economic Affairs Joaquin Almunia said that 
the Commission was still confident in the GOF's capacity to 
reduce its budget deficit within the Pact and Stability 
Growth limit.  Nonetheless, she warned that the Commission 
was "vigilant" as the French budget situation "remains 
fragile," and the Commission has not yet reviewed budget 
figures just provided by INSEE.  Eurostat will give its 
decisions on budget figures for France (including the one- 
time payment to CEA) and other EU countries on March 18. 
The Commission will release its own economic forecasts on 
March 21.  Torres eventually said "we'll see where we are 
for each EU country after March 21."  Private-sector 
economists are skeptical about the GOF's 2005 budget deficit 
objective given the economic slowdown in Europe, which will 
not help France to achieve 2.5% GDP growth in 2005. 
 
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Comment 
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11.  Breton is described as a successful and pragmatic 
manager at the head of Bull, Thomson and France Telecom. 
Thus, he may achieve further reduction in the CG budget 
deficit by restraining CG budget spending.  Implementing 
stricter control of health insurance spending will be harder 
as Breton does not have the lead on this issue.  The success 
of the health insurance reform will also require the 
cooperation of the medical sector, a sector that has already 
expressed its discontent.  Recent increases in prices of 
consultations approved by the GOF may not calm those in the 
sector who believe that reform is creating a "two-speed 
health system", one for the wealthy and one for others. 
 
12.  Reducing the budget deficit by increasing receipts will 
heavily depend on economic growth and job creation, and 
therefore on the GOF's ability to implement its program of 
measures and reforms (ref) as soon as possible.  The GOF has 
to take account of opposition politicians and unions' 
reactions. 
LEACH