Hollande’s soaring vows for growth may be shot down by increased taxes

By Catherine Bremer, Reuters

PARIS — French President Francois Hollande has set himself a deadline to turn around the economy by the end of 2014, but having hamstrung the effort with tax rises to meet deficit targets, economists doubt his growth goals will ever fly. Hollande in “battle mode” pledged to the nation on Sunday to reverse a relentless rise in unemployment and return the stalled economy to growth in two years, but a government spending freeze and looming tax rises in 2013 could stifle growth, much as they have elsewhere in Europe where deficit-cutting measures have been tried.

The Socialist leader also promised labor market reform next year, whether or not unions are on board, intended to boost job protection for employees and give firms more hiring flexibility, two more goals usually at odds. If he hopes to boost his approval rating with voters, which has drifted down to 44 percent just four months into his term, he will find economists a much tougher nut to crack. “The acid test is the return to growth, and I don’t see that happening,” said George Magnus, senior economic advisor at UBS. “If his principal message is: ‘We’re on course to get over this mess in the next two years,’ then I think that’s a delusion. It’s completely unrealistic. We do not have a credible plan that gives people confidence a return to growth is likely.” Despite market views that French growth will only recover to around 0.5 percent next year, most analysts think Hollande will be able to cut the deficit to within half a percentage point of a 3 percent of gross domestic product target as he targets 10 billion euros (US$12.8 billion) from freezing spending and 20 billion in raised taxes on employees and companies. What they cannot see is how a policy of hiking taxes squares with his pledge to fire up growth, especially given the lack of detail on what labor reform next year aimed at bolstering industrial competitiveness could entail. “I think they’re serious on plugging the deficit. It’s more on structural issues that I fail to see how the equation solves,” said senior Deutsche Bank economist Gilles Moec. “By skewing the effort towards business, because they want to protect workers, they’re going to worsen the financial position of the business sector, and this is where I see a contradiction in their strategy.” Economists Want Details Hollande’s immediate challenge is to produce a budget at the end of this month that must lay out at least 30 billion euros in savings, despite scaling back his 2013 growth expectations to around 0.8 percent from 1.2 percent previously. France’s state auditor has calculated that the government would need to find 33 billion euros in savings if 2013 growth is 1 percent and 38.5 billion if growth is 0.5 percent.