France says growth bodes well for deficit

France raised its growth outlook and forecast the budget deficit will narrow more quickly through 2022, as the economic recovery buoys public finances.

Gross domestic product will expand by 2 per cent this year and 1.9 per cent in 2019, more than the September projection of 1.7 per cent for both years, the finance ministry said Tuesday. The budget deficit will shrink to 2.3 per cent this year compared with a previous projection of 2.6 per cent. The so-called structural deficit — which adjusts for the impact of the economic cycle — will be 1.9 per cent instead of 2.1 per cent this year.

Budget Minister Gerald Darmanin told France2 television Wednesday: “We have to continue to make efforts to cut spending, and cut taxes.”

But with retirees, railway workers and students all staging protests against his plans to overhaul the French state, President Emmanuel Macron is delaying the major effort to rein in the budget shortfall until the second half of his five-year term.

After stripping out the effect of the economic expansion, the government will cut its spending by just 0.1 per cent of GDP this year and by 0.5 per cent in 2021 and 2022, the ministry said.

The so-called “stability program” and its forecasts will be presented to the cabinet Wednesday, debated in Parliament later this month and submitted to the European Commission by the end of April. The finance ministry says it hopes the program, the improved deficit targets and the economic reforms led by the government will help France exit the excessive deficit procedure of the EU Commission.

France and Spain are the only euro zone members still facing heightened budget controls.

“For the same level of performance, the cost of French government services is significantly higher than in neighbouring euro-region countries,” Bank of France Governor Francois Villeroy de Galhau said on Monday. “That contributes a drag on competitiveness and is part of the necessary structural reforms.”

The French economy is currently running faster than its long-term potential and will slow next year unless Macron makes more structural changes to boost its performance, Villeroy said.

Government debt will peak at 96.4 per cent of GDP this year, falling to 89.2 per cent by 2022, the government said. It previously saw debt reaching 97.1 per cent in 2019 and 91.4 per cent in 2022.

“Debt is a poison for France’s economy,” Finance Minister Bruno Le Maire told Le Figaro.