December 11, 2018 / 11:23 AM / 10 months ago

Macron's concessions set to blow out French deficit

PARIS (Reuters) - France will overshoot the European Union’s budget deficit ceiling next year without deeper spending cuts after President Emmanuel Macron caved in to anti-government protests.

Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday in an effort to quell a near month-long public revolt.

But the measures will leave a 10 billion euro (8.64 billion pounds) hole in the Treasury’s finances, pushing France back over the EU deficit limit of 3 percent of national output and dealing a blow to Macron’s reformist credentials.

“We are preparing a fiscal boost for workers by accelerating tax cuts so that work pays,” Prime Minister Edouard Philippe told parliament. “That inevitably has consequences on the deficit.”

Philippe did not give details on the impact of the concessions on public finances or possible spending cuts, saying only that the government aimed to keep spending from increasing.

“Under all likelihood, the 2019 public deficit will print above the 3.0 percent benchmark,” Societe Generale economist Michel Martinez wrote in a research note.

Any failure to respect the EU deficit ceiling could shatter France’s fiscal credibility with its European partners after Paris flouted it for a decade before Macron took office.

And any sign of leniency from Brussels could complicate the European Commission’s tense discussions with Italy about keeping its deficit down.

Italian Deputy Prime Minister Luigi Di Maio said Paris should be subject to the same treatment as Rome and now risked EU censure over its budget concessions.

“If the deficit/GDP rules are valid for Italy, then I expect them to be valid for Macron,” Di Maio said.

France’s 10-year borrowing costs climbed to their highest level compared with Germany in a year-and-a-half on Tuesday. DE10FR10=RR

Europe’s Scope credit rating agency said it was unlikely Macron would be able to push through reforms of France’s costly pension and healthcare systems if he continued to lose public support.

Budget Minister Gerald Darmanin said Macron’s concessions would amount to 10 billion euros, including the cancelling of energy tax hikes announced last week.

Darmanin told senators the government now expected a budget deficit of 2.5 percent of GDP in 2019, excluding the one-off impact of a long-planned payroll tax rebate scheme becoming a permanent tax cut at a cost of 20 billion euros.

That compares with a previous 2019 deficit/GDP forecast of 1.9 percent without one-offs, or 2.8 percent overall. The new, higher underlying deficit thus implies pushing the overall number towards 3.4 percent next year without measures to rein in spending.

French President Emmanuel Macron speaks during a special address to the nation, his first public comments after four weeks of nationwide 'yellow vest' (gilet jaune) protests, at the Elysee Palace, in Paris, France December 10, 2018. Ludovic Marin/Pool via REUTERS

Moreover, the “yellow vest” protests are slowing economic growth. Two opinion polls on Tuesday showed roughly one in two French people think they should now end their protests.

An Elysee official said on Monday France had some wiggle room on spending if the tax rebate was not taken into account.

The European Union’s executive arm is to make a final assessment of France’s 2019 budget in the second quarter of next year when it releases new economic forecasts, a spokesman said.

Reporting by Leigh Thomas and Simon Carraud, additional reporting by Jean-Baptiste Vey and Myriam Rivet; editing by Richard Lough and Robin Pomeroy

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