Budget puts France firmly on track for EMU

The French government yesterday announced a relatively painless budget for 1998, which respects the Maastricht guidelines and glosses over Socialist campaign promises. A sharp uptake in the French economy - and especially consumer spending - has come to Lionel Jospin's rescue. There is even talk in France of `bringing forward' the European single currency.
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The Independent Online
Three months ago it would have seemed impossible - ask President Jacques Chirac. He called - and lost - an early election partly because it seemed that the drawing-up of a 1998 budget, respecting the EMU guidelines, would be a political and fiscal nightmare.

The Socialist-led government yesterday presented the lame-duck President with a relatively painless pounds 160bn draft budget for next year, increasing some taxes, cutting some spending, notably on defence, but respecting the Maastricht targets without enormous suffering.

There are two explanations for this seeming act of prestidigitation by the Finance Minister, Dominique Strauss-Kahn. The first is the rapid uptake if the French economy, which is officially projected to grow by 2.2 per cent this year and 3 per cent next year. Mr Strauss-Kahn even forecast yesterday that France would be the best economic performer in Europe and North America in 1998.

The surge in the French economy has been driven by record exports and the falling franc but also, at long last, by a recovery of domestic demand. Figures released yesterday showed that consumer spending rose by 6.7 per cent in July (only to fall by 3.4 per cent with the holiday exodus in August).

There is a second explanation for the relative ease with which the Jospin government expects to meet the EMU target of a deficit of 3 per cent of GNP (the official projection is now a 3.1 per cent deficit this year and 3.05 per cent next year). Mr Jospin and Mr Strauss-Kahn have, in effect, buried or delayed all but one of the economic promises and projects on which they fought and won the general election campaign in May.

Yesterday's budget was a Socialist budget to an extent. It increased the tax burden on business and relatively well-off families and reduced the burden on the less well-off. It found money for job-creation projects for the young (the one promise clearly kept) and gave more money to education. But it imposed a freeze on most other spending and slashed defence allocations by 8.7 per cent.

Mr Jospin had pledged there would be no further tightening of the belt to meet the requirements of Maastricht; three months later EMU clearly rules in Paris.

The centre-left coalition government is now so much on board the Maastricht bandwagon - to the fury of some of its leftist constituent parts - that there is even talk in Paris of bringing forward the de facto starting date for the single currency. French officials have grown alarmed by the six-month gap in the Maastricht timetable between the final choice of participating countries and exchange rates (in the middle of next year) and the locking of currencies in January 1999. France fears this six- month hiatus will provide an irresistible roulette wheel for currency traders.

The treaty dates cannot easily be changed but French officials believe that some means might be found of, in effect, locking the exchange rates of EMU currencies together before the formal starting date.

None of this would be thinkable without the recovery of the French economy which eluded the previous centre-right government of Alain Juppe for so long. The recovery is little of Mr Jospin's doing, except that the change of political direction does seem mysteriously to have boosted the "animal spirits" of the French economy and persuaded households, and businesses, to start spending for the first time in years.

Mr Jospin's right-wing critics immediately suggested yesterday that this would be a budget to kill those animal spirits stone dead, increasing taxation on the middle classes and some sections of industry. The government disputes this.

It points out that the 1998 budget will not increase the state's consumption of French domestic product: the public sector will amount to 45.9 per cent next year, slightly less than the record of 46 per cent achieved in 1997 under a barely amended Juppe budget.

Taxes are increasing but they are also being adjusted to spare business which invests productively and to give as fairer deal to the less-well paid, who do badly under the French tax system. Some middle-class perks - including a tax break for domestic help - are being scaled back.

Family allowances are to be means-tested for the first time, a significant departure in welfare policy which may be extended to other areas. More of the cost of health policy is being shifted on to a "general social tax" which will hit savings as well as earnings.

Mr Strauss-Kahn, the Economy Minister, described it as a "frugal budget" which would correct several "fiscal injustices".