France finds debt easier to cut than deficit

France plans to chip away at its debt by selling more of its corporate stakeholdings but needs hard spending cuts to work the same magic on its budget deficit.
Economy Minister Christine Lagarde said on Sunday the state would sell between 5 and 7 percent of its stake in telecoms operator France Telecom and use the proceeds - an estimated 2.7-3.7 billion euros - to reduce public sector debt.
It is not the first time Paris has pulled this trick, which is fully compatible with European Union accounting rules, since some 16.4 billion euros of privatisation receipts, notably for motorway operating companies, helped flatter 2006 debt data.
Nor will it be the last time, according to analysts, who saw the move as partly aimed at deflecting criticism of tax cut plans from France's European Union partners, even though the money raised can only be used to cut debt and not the deficit.
"They seem to be trying to show they are not overlooking debt at a time when it looks like the budget deficit will be boosted by the amount of tax cuts being pencilled in," said Guillaume Menuet, economist at Merrill Lynch in London.
"It is a very easy way of raising money to cut debt given equity markets are doing well and I would expect them to do this with some of their other stakes in the next six months if equity markets continue to perform as strongly."
France's debt stood at 63.7 percent of gross domestic product in 2006, down from 66.2 percent of GDP in 2005 but still above the European Union's limit of 60 percent of GDP.
Economists agreed that Paris was likely in the coming months to try to sell part of its stakes in other firms that it did not consider strategic to the public's interests.
But even if the privatisation proceeds keep flowing in, the government will have to press on with spending cuts to prevent its budget deficit ballooning given EU rules do not allow privatisation proceeds to be counted against budget deficits.
"Maybe it is a way to quieten the criticism at home and overseas about their tax cut plans but it will only affect the debt and not the deficit," said Dominique Barbet, senior economist at BNP Paribas.
Planned tax breaks, including on home loans and overtime pay, are expected to cost at least 11 billion euros next year and are causing France's EU partners and the European Commission to question its ability to cut its deficit as promised.
Medium-term budget plans submitted by Paris to the European Commission earlier this year had projected France would run a budget deficits of 2.5 percent of GDP in 2007, 1.8 percent in 2008, 0.9 percent in 2009, and balance its budget in 2010.
President Nicolas "Sarkozy and his government will try to show they want to control spending but the deficit forecasts which France submitted to the European Commission look ambitious given the tax cuts," said Maryse Pogodzinski at J.P. Morgan.
The key to getting even close to such deficit targets will be spending cuts, with analysts focusing on a plan to replace only one out of every two retiring public sector workers. "Most of the tax cut measures will only impact the 2008 deficit so measures to balance part of this expenditure should be announced in the 2008 budget, notably with a reduction in the number of public sector workers," said Barbet at BNP Paribas.