France’s Socialist government unveils its first budget today, and it is expected to be the toughest for 30 years.
France has managed to stave off full-blown austerity until now, but worsening public finances and growth slowing to a standstill in the last quarter means Paris has to slam the brakes on public spending to ease pressure on the euro and stay credible in the international money markets.
“Balancing the government budget is the first step towards improving the growth rate. Now it’s a big risk because it’s possible that, as they try to reduce government spending and return to a balanced budget, they have a negative impact on growth. If growth fails, deficits increase, and they won’t be able to balance the budget. So it’s clearly a risk that he is taking, but that’s the calculation,” says the Paris Institute for Political Studies’ Christopher Bickerton.
Coalition partners the Greens have said they will not vote for the budget in parliament, so it will pass with support from the right.
“I think the French government has actually relatively modest assumptions for the growth outlook in 2013, and I think against that background that France will hit the target of three percent next year,” says Daiwa Capital Markets’ Tobias Blattner.
Thirty billion euros of cuts are designed to get the deficit back to three percent of GDP by the end of next year. But it is all happening as France struggles with its highest unemployment in 13 years.