Austerity challenge looms for Hollande

Fresh from securing an emphatic parliamentary majority, François Hollande will shortly face a new decisive moment in his young presidency when he confronts the state of France’s public finances.

A report due in two weeks by the Cour des Comptes, the national auditor, is set to lay bare the large gap that will have to be bridged for Mr Hollande to meet his commitment to reduce the budget deficit to 3 per cent of gross domestic product next year – and eliminate it in 2017.

The challenge is particularly acute for Mr Hollande, who has laid so much store by his calls for Europe to shift from a German-led emphasis on austerity to generating growth as the way out of the eurozone crisis.

His Socialist government, emboldened by achieving an outright majority in the National Assembly, was at it again on Monday.

“We need to mobilise our European partners because piling more austerity on top of austerity will lead to tragedy and a deep rift between the peoples of Europe and their politicians,” said Manuel Valls, the interior minister.

Mr Hollande’s potential difficulty is that this anti-austerity rhetoric, an important contributor to his victory in both the presidential and parliamentary elections, will soon have to be reconciled with the need to take tough measures at home to square the budget deficit.

With the election now over, even his allies are starting to demand some clarity. Nicolas Demorand, editor of the leftist newspaper Libération, wrote: “The commitment to return the public accounts to balance, taken in front of our European partners, leaves little doubt over the destination. The fog starts with the rest: the route, the method, the means. The moment has come to clear it.”

Tullia Bucco, economist at UniCredit Research, said: “It will require cuts in expenditure and that will be the most tricky part. There is no place to hide.”

The size of Mr Hollande’s majority should give him the room for manoeuvre he needs. The Socialists won 314 seats in the 577-seat assembly, with their Green allies taking a further 17. The stridently anti-austerity Left Front slipped back to 10 seats, undermining the Communist-dominated group’s ability to influence the government.

The government has already indicated it will have to find extra savings of €10bn just to meet this year’s deficit target of 4.5 per cent of GDP, as a stalled economy has hit receipts: a supplementary budget is due in July. But an even bigger task looms in framing next years budget, due in September, with savings of €25bn or more required to meet the 3 per cent goal – more if growth remains weak.

Pierre Moscovici, the finance minister, signalled last week that this year’s deficit shortfall would mainly be made up by raising taxes, with savings for next year shared between tax increases and spending cuts.

Jean-Marc Ayrault, the prime minister, warned on Sunday night of the “immense” task ahead. But he has also said much of the burden will be borne by the wealthiest households and big companies.

Mr Hollande’s famous pledge to raise marginal tax to 75 per cent on incomes above €1m a year is set to be deployed later this year – along with increases in wealth and inheritance taxes, surcharges on banks and energy companies and moves to raise taxes on capital earnings to match income tax rates.

The government is also set to target France’s abundant tax “spending” – ending tax breaks which cost the state dearly such as the exemptions on social charges and income tax on overtime introduced by Nicolas Sarkozy, Mr Hollande’s predecessor.

Mr Moscovici said: “I think we can reach our objectives without austerity.”

But with public expenditure accounting for 56 per cent of GDP and the tax burden already at high levels, independent economists believe painful cuts are inevitable, albeit not on the scale suffered in stricken economies such as Greece and Ireland.

“You cannot have no austerity and reduce the deficit to 3 per cent next year – and to zero in 2017 – without people feeling it. It would be better to admit it,” said Laurence Boone, Europe economist at Bank of America Merrill Lynch.

“A large chunk of public expenditure is in wages and pensions. If you are going to cut spending, they will be hard to avoid.”