VZCZCXRO9057
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #4349/01 2981145
ZNR UUUUU ZZH
R 251145Z OCT 07
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 0908
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 02 PARIS 004349 
 
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E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT:  THE SARKOZY ECONOMIC AGENDA: FISCAL ADJUSTMENT 
 
REFS:  A) PARIS 03401 
 
   B) PARIS 04315 
   C) PARIS 04327 
 
¶1. (SBU) SUMMARY:  President Sarkozy took office pledging to reduce 
France's public debt of nearly 65% of GDP and to boost growth rates 
by one percentage point.  Annual budget deficits have moved below 
the Maastricht criteria of 3% of GDP as a result of increasing 
revenues rather than cuts to public spending (which represents over 
52% of GDP).  France's longer-term financing challenges include 
chronic deficits in its social security system (which includes 
health and pension costs).  Faced with flagging economic growth, 
Sarkozy has provided fiscal stimulus through early tax cuts in hopes 
that his broader reform agenda will help deliver growth and bring 
the budget into balance by 2012.  On the expenditure side the 
government is seeking to rationalize and reduce the footprint of the 
public sector.  Reforms planned for 2008 would increase individuals' 
responsibility for health care and retirement in order to lessen the 
public sector burden.  This is the third of three cables on economic 
measures introduced by President Sarkozy (see refs B and C).  END 
SUMMARY. 
 
Tax Breaks First, Budget Balancing Later 
---------------------------------------- 
¶2. (SBU) In one of his first moves as president, Sarkozy made waves 
by attending the June Euro-group meeting of finance ministers and 
declaring that economic growth was his first priority. 
Consequently, France's pledged target to balance its budget by 2010 
would be pushed back to 2012.  The GOF subsequently introduced a 
package of tax cuts "to encourage work, employment and purchasing 
power" (ref A) at an estimated cost of 10 - 11 billion euros (0.6% 
of GDP) in 2008 (and up to 13 billion euros per year once fully 
implemented).  The package includes tax breaks for overtime work, 
deductibility of mortgage interest on principal residences, wealth 
tax credits up to 50,000 euros for investments in small businesses 
held for at least five years, and increased exemptions from 
inheritance taxes. 
 
¶3. (U) The 2008 government budget, announced in early October, 
projects the overall government deficit (including central 
government, social security, local authorities) to decrease to 2.3 % 
of GDP in 2008 from 2.4 % this year.  However, private sector 
economists believe the government's assumption of GDP growth between 
2.0 and 2.5% for 2008 to be overly optimistic. 
 
Reducing the Size of the State 
------------------------------ 
¶4. (U) The Sarkozy government plans to cut the size of France's 
civil service by not replacing one out of three retiring civil 
servants (trimmed from one out of two promised in the presidential 
campaign) in 2008, and one out of two by 2012.  Some 22,800 jobs 
will be eliminated in 2008, representing a savings of 458 million 
euros.  Observers say that 30,000 to 40,000 jobs would be eliminated 
each year by 2012, with one parliamentarian estimating that up to 
300,000 jobs could be eliminated by the end of Sarkozy's five year 
mandate. 
 
¶5. (U) During the campaign, Sarkozy said that he wanted to reduce 
the number of civil servants to free up resources for a 
better-trained, better-paid government service.  He called for a 
"revolution" in the broad public service sector by 2012, and 
suggested introducing private sector practices, such as buy-outs, to 
trim the bureaucracy.  Civil servants would be evaluated and 
compensated in line with private sector practices.  Current 
government plans will simplify the civil service, reducing the 
current 500 professional categories (ranging from diplomats to 
nurses) to 200.  On October 1 the government kicked off a broad 
consultative process, focusing on values, missions and the way work 
is organized in the civil service.  Unions representing civil 
servants support improvements in compensation and training, but are 
skeptical that shrinking the public sector is in their interest. 
 
Rationalizing Social Security 
------------------------------ 
¶6. (U) In order to reduce the chronic deficits in the off-budget 
health care system (projected to be 8.9 billion euros in 2008), the 
GOF is introducing measures to cut health benefits.  The 2008 draft 
social security budget puts new limits on reimbursement rates for 
medical procedures and services provided by specialists.  A 
co-payment system ensures that patients bear a (still modest) 
portion of the cost of treatment.  In addition, system spending for 
generalist care will receive the smallest increase (2%) of all 
categories of health care.  The changes are designed to save 850 
million euros annually in generalist care. 
 
PARIS 00004349  002 OF 002 
 
 
 
Continuing the Reform of Pensions 
--------------------------------- 
¶7. (U) The October 18 nationwide strike of transport and energy 
sector workers, considered the first test of the Sarkozy 
government's mettle, underscores the challenge of reforming the 
pension system.  The strike followed the initiation of 
government/union consultations on proposals to reform the "special 
regimes," which allow workers in a number of once-dangerous 
professions to retire early and with higher pensions.  The objective 
is to have all workers contribute to the pension system for 40 years 
to qualify for full pensions.  The current pay-as-you-go system for 
special regimes has a chronic shortfall (5 billion euros in 2006). 
(The ratio of workers to retirees is 50% in the special regimes 
compared with 64% in the general pension system). 
 
¶8. (U) The government is also looking to plug growing budgetary gaps 
in the pension system for private sector workers (estimated at 4.7 
billion euros in 2007, 8 billion euros in 2010 and 43 billion euros 
in 2020).  The Advisory Council for Pensions, an independent 
government agency, projects the pension system deficit for private 
sector workers will total 1.0 % of GDP in 2020 and 3.1 % in 2040. 
Among other measures, the government plans to eliminate compulsory 
retirement before the age of 65.  President Sarkozy has announced 
that, beginning in 2008, most categories of civil service employees 
will have to work 40 years to qualify for full benefits instead of 
the 37.5 years heretofore required. 
 
Making Government More Efficient 
-------------------------------- 
¶9. (U) To achieve greater efficiency, the Sarkozy government is 
reorganizing various administrative agencies, consolidating 
ministries and encouraging performance-based standards in 
government.  The Finance Ministry has taken advantage of 
recently-implemented rules allowing ministries to use personnel 
budget savings for other purposes by cutting nearly 3000 staff 
positions and using the resources for needed operational 
improvements.  Although improving efficiency is hardly 
controversial, some measures are likely to offend well-organized 
constituencies.  A proposal revived by the Sarkozy government to 
merge the two agencies that assess and collect France's taxes (and 
eliminate over 6000 jobs in the process) led to the resignation of 
the then-budget minister when first mooted in 2000. 
 
Comment: 
------- 
¶10. (SBU) Although successive governments have made incremental 
progress on fiscal sustainability (notably on pension reform), the 
Sarkozy government faces critical challenges in putting France's 
financial house in order.  The president appears willing to risk 
larger near-term deficits -- and the opprobrium of EU partners -- in 
order to build support for a reform agenda he hopes will boost 
growth and balance budgets over the longer term.  But whether his 
proposals to tackle public sending will bear fruit is unclear.  The 
special regimes pension reform is expected to be a critical first 
test.  In contrast with the 1995 strike over similar retrenchment, 
the French public endorses the idea that workers in both public and 
private sectors will have to work longer to qualify for full 
pensions.  The fate of other proposals, including cuts to the civil 
service, will depend on Sarkozy's ability to maintain political 
momentum.  The considerable outcry over very modest proposed 
co-payments for medical care indicates the sensitivity of the French 
public to perceived cuts in public service, and the considerable 
challenges that lie ahead for Sarkozy. 
 
STAPLETON