VZCZCXRO7769
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHFR #5622/01 2341645
ZNR UUUUU ZZH
R 221645Z AUG 06
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0555
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 02 PARIS 005622 
 
SIPDIS 
 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
STATE FOR EB and EUR/WE 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/OEURA 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT: FUZZY MATH COMPLICATES FIRST SEMESTER FRENCH BUDGET 
ANALYSIS 
 
 
¶1. SUMMARY:  The central government budget deficit declined nearly 
25 percent at the end of the first semester compared with the same 
period last year.  However, the decrease was largely artificial, 
owing more to recent cosmetic reforms to the French finance law than 
to cuts in spending.  Strong tax receipts do mean that the GOF is 
likely to reach its fiscal target for an overall budget deficit of 
2.8 percent of GDP in 2006.  Finance Minister Thierry Breton has 
downplayed the budget figures, however, since France still has a 
huge public debt.  Nevertheless, the GOF temptation to spend may 
grow, given the current health of the budget and the imminent start 
of the electoral campaign season.  END SUMMARY. 
 
The Declining Deficit 
--------------------- 
¶2.  On August 9, the GOF announced that the French central 
government (CG) deficit stood at 26.9 billion euros (USD 34.4 
billion) at the end of the first semester - a significant decrease 
from the 35.7 billion euros (USD 45.7 billion) registered at the 
close of the first semester 2005.  CG budget spending decreased by 
16.4 billion euros (USD 12.8 billion) to 131.9 billion euros (USD 
103.1 billion).  However, the drop-off is not exactly the result of 
reduced spending but rather the reflection of modifications in 
budgetary procedures.  Under the new finance law (Loi Organique 
Relative aux Lois de Finance - "LOLF") implemented this year: 
  -- an independent pension account for state employees was 
established, and its expenses are calculated separately. 
  -- cuts in payroll taxes on low wage positions are no longer 
considered CG expenses, but now are incorporated into the social 
security accounts. 
  -- some spending outlays including transfers to local authorities 
will not occur until the second semester due to calendar changes in 
the new government finance law. 
 
Taking this into account and holding everything else constant, 
spending decreased only 2.3 billion euros (USD 2.9 billion) between 
the first semester 2005 and the first semester 2006.  Even this, 
according to the GOF, was an anomaly; officials have assured 
observers that "spending will get back to its annual rate of 
progression based on a 1.8 percent inflation rate" in the coming 
months. 
 
Taxes surprise, continue to provide strong revenue 
--------------------------------------------- ----- 
¶3.  The same budget reforms have had equally misleading effects on 
tax revenue.  CG receipts amounted to 117.4 billion euros (USD 150.2 
billion) at the end of the first semester 2006, which represents a 
drop of 6.6 billion euros (USD 8.4 billion) over first semester 
levels from last year.  Again holding everything constant, however, 
tax revenue actually appears to have increased 6.7 percent. 
Earnings from TVA, the largest source for CG tax receipts, driven by 
exceptionally high domestic consumption, rose 5.7 percent (versus 3 
percent in the 2006 budget bill).  At the same time, the solidarity 
wealth tax brought in 3.45 billion euros (USD 4.4 billion), a 15 
percent increase, and receipts from the tax on business jumped by 
11.6 percent (versus a 1.5 percent increase in the 2006 budget 
bill).  The tax on business was originally expected to produce a 500 
million euro surplus over the course of 2006, but already it has 
managed to amass 2.5 billion (USD 3.2 billion).  Income tax receipts 
increased 3.9 percent, apparently due to more people using the 
internet to pay their taxes.  Most important, in terms of the long 
term effect on revenue flows, more French are choosing to pay their 
income taxes on a monthly basis.  To date, rising oil prices have 
not resulted in higher tax receipts. Companies reduced consumption 
of petroleum products to reduce operating costs.  All in all, Budget 
Minister Jean-Francois Cope announced that 2006 CG tax receipts 
could be 1 to 3 billion euros higher than expected. 
 
Breton holds the line 
--------------------- 
¶4.  Given such solid tax revenue, some analysts think the GOF is 
likely to end the year awash with unexpected (and unspent) cash 
flows.  The sharks in Parliament smell blood in the water; there is 
already enormous pressure on Finance Minister Thierry Breton to 
officially scale up estimates of CG budget receipts.  Fearing a 
"nest egg" effect among lawmakers, however, he has refused to stray 
from original estimates.  He has pointed out that figures from the 
first semester of 2006 "were exceptionally low" and should not be 
used to extrapolate future results. For his part, in the economic 
newspaper Les Echos on August 14, Cope said that the 2006 overall 
budget deficit (including central government, social security, and 
local authorities) was likely to be close to the 2.8 percent of GDP 
target (well below the 3 percent of GDP target set by the EU). 
However, Cope also warned about "the long road toward eliminating 
 
PARIS 00005622  002 OF 002 
 
 
public debt." 
 
Comment 
------- 
¶5.  With the beginning of the French electoral campaign, political 
pressure to increase government spending is sure to mount.  For the 
moment, however, the GOF appears determined to reign in 
expectations, and continue to use any extra tax revenues to pay down 
its considerable public debt. 
 
HOFMANN#