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UNCLAS SECTION 01 OF 02 PARIS 007345 
 
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E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT: France Ponders 2007 Social Security Budget 
 
Refs: (A) Paris 6668;  (B) 03 Paris 4736;  (C) 04 Paris 4141 
 
¶1. SUMMARY:  As part of efforts to reduce the overall budget deficit 
to 2.5 percent of GDP in 2007, Health Minister Xavier Bertrand 
unveiled a 2007 social security budget with a cap on health 
spending, reducing the social security deficit to 8.0 billion euros 
(12.2 billion dollars).  The social security deficit ultimately may 
exceed the target, however, since legislators may want to be more 
generous to constituents, especially after hearing doctors' 
objections.  The pension deficit will get worse due to the 
retirement of baby boomers.  Pension reform will not be reexamined 
before 2008 (after the 2007 elections) given the political 
sensitivity of the issue.  END SUMMARY 
 
Reducing the Social Security Deficit: A Necessity 
--------------------------------------------- ---- 
¶2.  Health Minister Xavier Bertrand unveiled the 2007 draft social 
security budget on October 11, stressing it was "a major step" in 
the reduction of the overall budget deficit (including central 
government, social security and local authorities) to 2.5 percent of 
GDP (ref A).  The social security deficit (including health, family 
allowances, pensions and work-related accidents) should narrow to 
8.0 billion euros (10.2 billion dollars) in 2007 from 9.7 billion 
(12.1 billion dollars) in 2006, a sharp improvement after record 
deficits in 2004 (11.9 billion euros or 14.8 billion dollars), and 
in 2005 (11.6 billion euros or 14.4 billion dollars).  Nevertheless, 
in a recent report the public finance auditors (GAO counterpart, 
"Cour des Comptes") warned that the social security deficit would 
increase "considerably" to 37 billion euros (46 billion dollars) by 
¶2009.  Auditors deemed that the health, family allowances and 
pension deficits are "structural and long-lasting."  Cour des 
Comptes President Philippe Seguin concluded "the social security 
system will require new and urgent reforms soon," namely, reforms 
going beyond the 2003 pension (ref B) and the 2004 health insurance 
reforms (ref C). 
 
Health Insurance Deficit Narrows 
-------------------------------- 
¶3.  In announcing the budget, Minister Bertrand said that "the 
social security system is doing better."  Health insurance 
expenditures, which account for most of the social security deficit, 
are expected to fall to 3.9 billion euros (4.9 billion dollars) in 
2007 from 11.6 billion euros (14.5 billion dollars) in 2005 and 6.0 
billion euros (7.5 billion dollars) in 2006.  The decrease in the 
unemployment rate (currently under 9.0 percent, its lowest level in 
four years) contributed to the improvement by increasing receipts 
from health insurance payroll taxes.  The improvement was also due 
to continuing cost-cutting measures affecting reimbursement, generic 
substitution, and the selection of a referent practitioner.  The 
government set the 2007 national health-insurance spending target 
(known as "ONDAM - Objectif National de Depense 
d'Assurance-Maladie") at 2.5 percent above 2006 levels (3.5 percent 
for hospitals spending and 0.8 percent for other spending including 
visits to doctors and drugs), down from 3.9 percent in 2005, 2.7 
percent in 2006, and from an all-time high of 7.1 percent in 2002. 
As part of continuing effects of the 2004 health reform, in 2007 all 
patients except the most disadvantaged and children will pay 1 more 
euro per hospitalization day each day (16 euros per day versus 15 
euros or 19 dollars in 2006).  A personalized medical record 
creating an electronic medical history documenting all of patients' 
cases will contribute to rationalizing and controlling health 
spending growth. 
 
¶4.  CSMF, the main doctors union, deemed the spending target 
("ONDAM") "unrealistic and untenable." Instead the doctors called 
for a health spending target of 0.8-1.5 percent, arguing they 
already have made efforts to cut corners in recent years.  Some 
center-right and socialist deputies spoke out against the 2007 
social security budget, including Francois Sauvadet, the spokesman 
of center-right UDF deputies, who deemed the budget as 
"unacceptable," and said "it could not be passed as is." The 
government promised that "a gesture would be made to loosen ONDAM." 
The National Assembly Social Affairs Commission subsequently 
accepted an amendment to increase the ONDAM for visits at doctors to 
1.2 percent. 
 
Family Benefits and Work-related Accidents 
Contribute to the Improvement 
------------------------------------------ 
¶5.  The family benefits deficit is expected to narrow to 700 million 
euros (875 million dollars) in 2007.  New measures include a 
zero-interest loan for young adults who are entering the labor 
market, and support to families taking care of handicapped parents. 
The work-related accident scheme should post a slight surplus of 100 
 
PARIS 00007345  002 OF 002 
 
 
million euros (125 million dollars). 
 
Pension Deficit Increases due to Retiring Baby Boomers 
--------------------------------------------- ---- 
¶6.  The government expects the pension deficit to increase to 3.5 
billion euros (4.4 billion dollars) in 2007 from 1.9 billion euros 
(2.4 billion dollars) in 2005 and 2.4 billion euros (3.0 billion 
dollars) in 2006 as the first of the post-WWII baby-boomers  retire. 
 The French system must also finance the Fund for Solidarity with 
the Elderly ("Fonds de Solidarite Vieillesse") that responds to 
"early" retirements of workers who entered the labor force at an 
early age (as young as 14). 
 
¶7. In October Former Labor Minister Francois Fillon revived tensions 
within the UMP center-right majority by calling for a reform of 
special pension schemes that grant particularly attractive benefits 
to employees of  the national rail road company SNCF, the Paris 
metro and bus transportation system RATP, the utility companies EDF 
and GDF, and the Bank of France, if the center-right wins elections 
in 2007. Prime Minister Dominique de Villepin said that a decision 
on the matter would be made in 2008 (after next year's elections) as 
planned by the 2003 pension reform. 
 
2007 Social Security Budget Helps Support Job Creation 
--------------------------------------------- --------- 
¶8.  The 2007 social security budget includes measures in favor of 
employment, notably more flexible rules for people wanting to work 
while drawing a pension, and elimination of the obligation to retire 
at 65.  The budget extends benefits paid to the unemployed who 
create or buy companies.  The budget also creates social and tax 
incentives for companies to encourage employment and new skills 
 
More Focus on Tracking Fraud 
---------------------------- 
¶9.  The government plans to create a National Anti-Fraud Committee 
to track fraud affecting all components of social security spending 
and receipts.  Based on government estimates, at least 100 million 
euros could be recuperated in 2007.  An ID card including a picture 
of the holder, a more secure version of the current "Carte Vitale," 
would track medical expenses and relay information about the medical 
records of all patients. 
 
GOF Minimizes Budget Tricks 
--------------------------- 
¶10.  The government ruled out increasing payroll taxes and social 
contributions (which are already high), because of the likely 
negative effects on consumption and French competitiveness.  And it 
largely avoided resorting to contemplated budget tricks, such as 
securing early payments of the social contribution ("Contribution 
Sociale Generalisee" - CSG) on life insurance contracts.  In the 
2006 budget, a similar move on housing savings accounts ("Plan 
d'Epargne Logement") proved unpopular.  The government did request a 
2 billion euros (2.5 billion dollars) one-time contribution from the 
French postal system, La Poste, for taking over the pension 
liabilities of its employees.  La Poste will have to pay 
contributions for its employees' pension scheme going forward. 
 
COMMENT 
------- 
¶11.  France made significant progress in its health insurance reform 
of 2004, although the goal of eliminating the health insurance 
deficit by 2007 has proven not to be possible.  Another 
belt-tightening reform of the health insurance system would be 
unpopular in an election year.  Similarly, reforming pensions by 
revising special regimes is a politically perilous undertaking in 
France.  The final 2007 social security budget will probably result 
in a higher-than-expected social security deficit and, therefore, a 
larger overall budget deficit.  As with the GOF's overall fiscal 
policy, the future direction of social security reform could be 
significantly altered by the result of the 2007 presidential 
elections. 
 
STAPLETON#