Socialist Francois Hollande, favourite to become next president of France, is working on a 50 billion euro package of tax hikes and spending curbs that will be rolled out rapidly if he wins election six months from now, a Hollande adviser told Reuters.
In a major departure from traditional left-wing policies, an
election programme being drafted by Hollande's team commits the Socialists to a hefty deficit-reduction plan from the outset of his five-year term, coupled with a plan to boost economic growth in the following four years, according to two advisers.
This is a watershed for the left, said Karine Berger, an economics expert who is part of a team advising the 57-year-old Hollande on an election programme he is due to unveil early next year, ahead of an election that takes place in two rounds next April 22 and May 6.
Safeguarding France's top-notch triple-A credit rating -- which allows the country to service its debt as cheaply as possible -- is a top priority and makes shrinking the public deficit to three percent of gross domestic product in 2013 the most important initial step, Berger said.
What we're saying is that the first thing to be done is to get the deficit under three percent (of GDP). From there, objectively, the move towards budget balance in 2017 is almost automatic, said Berger, a former finance ministry official who has also worked in banking. We're talking about 50 billion euros.
That 50 billion euros would come partly from tax rises and partly from spending cutbacks, perhaps two-thirds from tax and one-third from spending curbs, or possibly half and half, Berger said, adding that precise proportions were not yet set in stone.
President Nicolas Sarkozy's government also aims to cut the deficit to the EU norm of no more than 3 percent of GDP in 2013 from an expected 5.7 percent this year.
It announced 65 billion euros of budget cuts on Nov 7, but over five years.
FRONTLOADING THE PAIN
Berger said the frontloaded Socialist cutbacks would only be credible for voters and markets if accompanied by a plan to ensure economic growth after the initial belt-tightening exercise. The current government predicts growth at just 1 percent in 2012 down from an earlier 1.75 percent forecast and some analysts say the economy may shrink slightly.
Even more sensitively, in a country that cherishes its generous public welfare system, Berger said the Socialists would seriously consider cuts in state reimbursement of medical costs, above all doctor consultation fees.
Berger's comments tally with what the chief coordinator of Hollande's election programme, former finance minister Michel Sapin, told Reuters last week, when he said the thrust would be to break the back of the deficit troubles first thing, and then follow up with a clear plan to boost growth.
Back in 1981, when the now-late Francois Mitterrand took power, his opening shot was a wave of nationalisations and big public spending commitments, followed by an abrupt reversal two years later. Mitterrand was the first Socialist President of the post-war French fifth republic and Hollande hopes to be the second, after a 17-year hiatus.
Berger said other countries engulfed by the debt market crisis in the euro zone were being forced to announce emergency budget cuts to calm markets, but without a plan for the longer term these plans have relatively little impact.
Greece and Italy are collapsing macroeconomically, which means all the budget measures they throw at the problem are literally being diluted by economic contraction, Berger said.
If the end-point is 2013, we will not be credible either. So what we have to deal with is what comes after that date as well. The problem that comes afterwards is not a problem of spending and tax, it's a question of economic growth.
The thrust, and above all the sequencing, is a far cry from the Socialist Party programme published earlier this year before Hollande became presidential candidate.
The commitment to a deficit target of 3 percent in 2013 was not even mentioned as an explicit objective and while it said the Socialists would scrap 50 billion euros of tax breaks implemented under Sarkozy, only 25 billion would go into deficit reduction while the other half would fund policy promises.
The new thinking has been prompted by investors pushing the French-German interest rate spread -- the premium they demand versus what they ask for to buy German debt -- to record levels.
In his meeting with Reuters last week, Sapin said that the new focus on state finances did not mean that the Socialists would be turning their back on some of the more striking pledges in the party programme, among them creation of 300,000 state-aided jobs, a plan that still has to be fine-tuned.
When we say 3 percent in 2013 and that Francois Hollande is aiming for balance at the end of his term, that's sacrosanct. That's the way it is, said Sapin.
(Additional reporting by Leigh Thomas, Yves Clarisse and Geert De Clercq; editing by Geert De Clercq and Philippa Fletcher)