France will miss its European Commission debt targets this year and in 2015 because it failed to curb spending on healthcare and pensions and increased corporate taxes, which stalled growth and jobs, the EU’s executive said today (2 June).
Under EU law, governments must not run budget deficits higher than 3% of economic output or gross domestic product (GDP). If they do, they fall under the excessive deficit procedure, which could lead to fines.
The Commission today ended the procedure against Austria, Belgium, Denmark, the Netherlands, Slovakia and the Czech Republic. Poland and Croatia had taken the steps needed to bring budget shortfalls within EU limits. 11 countries still in the excessive deficit procedure compared to 24 in 2011, the height of the crisis.
European Commissioner for Economic and Monetary Affairs, Olli Rehn, blamed France’s expected failure on weaker growth forecasts for 2015 and the fact that some stability measures “were not specific enough at this stage.”
“According to our forecast France will not respect the nominal target for public deficits this year, 2014 or 2015,” he said.
Rehn also blamed President François Hollande’s high taxation on business for the lack of investment and ultimately growth and employment.
He said: “In France, in the past years, there was quite a strong emphasis on tax increases in fiscal consolidation, which in the beginning was understandable because there was a need for rapid and front-loaded action […] but overtime, if this continues for too long and if there is no sufficient expenditure reduction, then these excessive tax increases become a burden for growth and they start suffocating economic growth and employment creation.”
“Our recommendation is that the route of tax increases is not the way to increase sustainable growth and job creation in France,” he added.
According to the French Minister for Finance, Michel Sapin, France is determined to reduce its public debt to 3% of GDP by 2015 (here).
Since his election two years ago, Hollande has raised corporate tax, income tax and VAT. Reportedly, the French government faces a €14 billion black hole in its public finances after overestimating tax income for the last financial year by nearly half. France’s Court of Auditors said receipts from all three taxes amounted to an extra €?16 billion in 2013 but the government forecast €30 billion of extra tax income.
It’s the latest slip-up from Hollande, who, in a U-turn, has promised to improve the economy by giving businesses tax breaks. He faces record low levels of popularity because of rising unemployment and his plans to cut public spending.
France must slash healthcare expenditure and freeze pension costs, according to the Commission’s country specific recommendations for economic recovery. Social security accounts for nearly half of France’s public sector expenditure.
In May this year, France submitted a reform programme and a stability plan. The programme broadly responded to an earlier Commission recommendation. Although it was not sufficiently robust to ensure France met its 2015 deadline, it did ensure France escaped an excessive deficit procedure at this stage.
“It’s essential that France continues in the route of reform,” Rehn said before adding the Commission would follow its progress closely.
The recommendations will be discussed by EU leaders and ministers later this month. They were made for 26 countries, excluding Greece and Cyprus, which are in bailout programmes.
Once adopted by the EU’s Council of Finance Ministers (ECOFIN) on 8 July, member states must implement them into their policy and budgets.
The Commission also published a report analysing the reasons for a planned and forecast breach of public debt rules by Finland, which stands at 60% of GDP. It said that an excessive deficit procedure was not merited because the excess was caused by Finland contributions to “solidarity operations” for the euro area.
With an annual deficit of 4.1% of GDP in 2013, France has exceeded budgetary limits established by the Treaty of Maastricht.
The European Commission launched measures to deal with excessive deficit and gave France an extra two years to reduce its public deficit to 3%.
French public debt is almost at 95%. The rate of tax contributions is already at 46%.
26-27 June: EU leaders to discuss country-specific recommendations