Photo: AP Images
Yesterday, we wrote that there was one glaring problem with the Spanish government’s new 2013 budget plan: The economic forecasts baked into the government’s budget projections are wildly unrealistic.The French government just announced it’s new budget today, and lo and behold – it looks like they just made the same mistake.
The new budget aims to reduce the French government’s budget deficit by 1.5 percentage points to 3 per cent of GDP in 2013.
That would bring it in line with the 3-per cent budget deficit limit laid out in the Maastricht Treaty (the EU’s founding document).
To do this, the 2013 budget imposes a controversial 75 per cent tax rate on millionaires, which the government believes will raise income tax revenue by 23 per cent. The other big tax hike is on corporations, which the government expects will raise 30 per cent more corporate tax revenues in 2013.
Given the government’s ambitious budget deficit target and the austerity measures required to get it there, the 2013 budget was presented to France today as the toughest belt-tightening for the country in 30 years.
But again, there’s one thing that’s going to make it a lot tougher. The growth assumptions the new budget hangs its hat on are likely to prove incorrect.
The French government forecasts 0.8 per cent GDP growth in 2013.
But SocGen economists expect zero growth in 2013.
And both Deutsche Bank and Citi economists expect -0.2 per cent – i.e., a recession.
Citi strategists Robert Crossley and Nishay Patel sum it up nicely this morning in a note to clients:
The government’s 0.8% 2013 GDP baseline is too optimistic, in our view…and we expect France to miss its 3% budget deficit target by 0.7%.
Every year since 2005, the government has been more optimistic than the consensus about the following year’s growth. And although the consensus has turned out to be more accurate than the government forecast in each case, the consensus has typically overestimated actual growth by 0.6%.
If the official GDP assumptions are wrong to the extent we think, we expect a supplementary budget in early 2013. February 2013 would be the obvious time after Q4 GDP but earlier is also possible.
On government estimates, their 0.8% baseline would require €30bn of budgetary adjustments to reduce the budget deficit from 3% of GDP in 2013 to 4.5% in 2012. Our economists’ GDP estimate of -0.2% would require up to €48bn (2.4% of GDP), i.e., an extra €18bn.
Deutsche Bank economists in their new World Outlook report paint a depressing picture for France as well, saying that the economic benefits of the euro for France are now an “exhausted model”:
France has been defying gravity with three quarters in a row of stagnating GDP. However, we expect outright recession in H2 2012, with two quarters of GDP contraction, followed by only subdued recovery. Indeed, domestic demand is faced with two headwinds: wage austerity and fiscal retrenchment, while exports are hit by the slowdown in external demand. France’s economic model since the beginning of monetary union, where productivity gains are channeled to real wages growth and consumer spending, looks to have touched its limits.
France announced its final estimate of second-quarter GDP growth this morning. It came in unchanged and in line with analysts’ expectations at 0 per cent. No growth. And none on the horizon, according to the economists.
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