VZCZCXRO6760
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #1626/01 2351617
ZNR UUUUU ZZH
R 221617Z AUG 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 4176
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUCNMEM/EU MEMBER STATES COLLECTIVE

UNCLAS SECTION 01 OF 03 PARIS 001626 
 
SENSITIVE 
SIPDIS 
 
PASS FEDERAL RESERVE 
PASS CEA 
TREASURY FOR DO/IM 
TREASURY ALSO FOR DO/IMB AND DO/E WDINKELACKER 
USDOC FOR 4212/MAC/EUR/ 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV FR
SUBJECT:  THE GOF TURNS TO DEFICIT CUTTING 
 
¶1. (SBU) SUMMARY:  Although part of the Sarkozy teamQs 
campaign platform, fiscal adjustment was put on the 
back burner in favor of other reform priorities 
following the 2007 elections.  Now under considerable 
budgetary pressure, the GOF has ruled out further tax 
cuts (with an exception for reform of the professional 
tax and the elimination of a corporate tax) and 
reiterated its commitment to eliminate the budget 
deficit by 2012.  But a stalled economy and the impact 
of the August 2007 tax package will knock the GOF from 
its intermediate deficit target in 2009, despite 
efforts to rein in spending, eliminate fiscal 
incentives and fight tax fraud.  The difficult 
budgetary environment will raise the bar for GOF 
overseas engagements that impose new spending 
commitments.  END SUMMARY. 
 
ELIMINATING THE BUDGET DEFICIT BY 2012 
---------------------------------- 
¶2. (U) In recent interviews Economy Minister Lagarde 
has said her fiscal priority through 2012 is to 
eliminate the public deficit, not lower taxes.  The 
government hopes to reduce the budget deficit to 2.5 
percent of GDP in 2008 and 2.0 percent in 2009, on its 
way to balance (and a reduction in public debt from 
63.9 percent to 60.0 percent of GDP) by 2012.  The 
2007 government budget deficit (central government, 
social security system and local authorities) was a 
higher-than-expected 2.7 per cent of GDP, and the 
deficit has been running above forecast for the first 
half of 2008. 
 
ELIMINATING FISCAL INCENTIVES, REFORMING BUSINESS 
TAXES 
----------------------------------- 
¶3. (U) In a move to increase revenue Lagarde has 
proposed eliminating (on a case by case basis) a range 
of existing tax incentives estimated to cost the 
budget 5 billion euros annually.  Although the GOF has 
not specified the targeted measures, exemptions for 
investing in FranceQs overseas territories and tax 
breaks for investing in rental properties are among 
those most frequently mentioned.  Lagarde has defended 
exemptions from the wealth tax (FranceQs tax on 
households with assets over 750,000 euros) for 
investments in small business, a measure introduced by 
the Sarkozy government in 2007. 
 
¶4. (U) Lagarde has proposed eliminating a flat rate 
tax (QImposition Forfaitaire Annuelle Q IFAQ) 
currently imposed on businesses with annual sales of 
over 300,000 euros (paid on top of top of the 
corporate income tax).  And she says the government 
plans to reform the controversial Qprofessional tax 
as early as September.  (Note: An important source of 
revenue for local authorities, the professional tax is 
based largely on a companyQs fixed assets and varies 
from region to region.  End note)  A Ministry of 
Finance budget document has described the tax as Qthe 
most harmful tax for economic growth and 
competitiveness of the economy. 
 
FIGHTING TAX FRAUD 
------------------ 
¶5. (U) The GOF is putting renewed emphasis on the 
fight against tax fraud, which is estimated to have 
cost the government 29 - 40 billion euros annually 
over the past several years.  (Note: The government 
budget deficit in 2007 was 51 billion euros.  End 
note.)  Budget Minister Woerth has proposed creation 
of a special judicial unit, to be placed under the 
authority of a judge, that would specialize in tax 
fraud investigations.  In early 2008 Woerth oversaw 
the creation of the National Delegation for the Fight 
Against Fraud (DNLF), a structure designed in part to 
serve as a clearinghouse for improving coordination 
among public institutions in the fight against fraud. 
 
ECO-TAXES IN, JUNK FOOD TAXES ON THE HORIZON? 
---------------------------------- 
¶6. (U) Following its broad-based 2007 consultative 
forum on environmental policy -- the "Grenelle de 
lQEnvironnementQ-- the GOF introduced a system of 
financial rewards and penalties (Qbonus/malusQ) to 
 
PARIS 00001626  002 OF 003 
 
 
steer consumers towards low-carbon emission 
automobiles.  The program has been popular and 
Minister for Sustainable Development Borloo says 
average emissions for new vehicles sold have dropped 
nine percent in the eight months of the programQs 
existence.  But demand for heavily-polluting vehicles 
has proven more elastic than expected, and a program 
that was designed to be revenue neutral has cost the 
government 140 million euros.  Borloo now wants to 
extend the Qbonus-malusQ system to other goods in 2009 
(including refrigerators, light bulbs and flat screen 
computers).  Finance Minister Lagarde and Budget 
Minister Woerth are pushing back, arguing that the 
government should tax polluting goods rather than 
provide payment for use of environmentally-friendly 
products. 
 
¶7. (U) Woerth has also teamed up with colleagues to 
look at other tax policy options for correcting 
perceived market failures and boosting revenue.  The 
GOF has considered a tax on trucks transiting 
France indexed to distance travelled, a measure that 
could bring in 1 billion euros a year by 2010.  And 
together with Health Minister Bachelot Woerth 
commissioned a study of possible measures to fight 
obesity, cardiovascular diseases and cancers. 
Government staff recommended boosting the VAT rate 
from 5.5 to 19.6 percent on mass market food stuffs 
deemed "too rich, too sweet, too salty and not 
strictly necessaryQ (including pizzas, hamburgers and 
sandwiches).  In the end the GOF delayed a decision 
out of concern for penalizing Qthe most 
underprivileged population, who eat badly,Q and in 
light of the inauspicious inflationary environment. 
 
CUTTING THE HEALTH INSURANCE DEFICIT AND FUNDING 
PENSIONS 
---------------------------------- 
¶8. (U) The government says elimination of FranceQs 
national health insurance system deficit is essential 
to achieving a balanced budget by 2012.  Budget 
Minister Woerth told the press the deficit would 
increase 2.0 billion euros per year if steps werenQt 
taken to rein in spending.   To trim the current 4.1 
billion euro deficit the government plans to raise 1 
billion euros per year by increasing a tax on sales of 
health insurance and mutual insurance companies that 
provide top-up cover to the national health insurance 
system.  The government will also try to curb over- 
prescription of medication, and reduce reimbursements 
for x-rays, blood tests and hospital transport.  The 
government has ruled out increasing the QContribution 
Sociale Generalisee (CSG),Q a tax on all forms of 
income devoted to funding FranceQs broad welfare 
system (Qsocial securityQ).  But it plans to extend 
the tax to include profit-sharing in income already 
subject to the CSG, a proposal that has drawn the ire 
of the business community. 
 
¶9. (U) To cover pension shortfalls the government 
plans to increase payroll taxes by 0.3 percentage 
points on January 1, 2009 and 1 percent point by 2011 
(in addition to steps taken to extend the retirement 
age).  The increase would be offset by an equal cut to 
the unemployment insurance contribution.  The 
Unemployment Insurance Fund (UNEDIC), which collects 
the contribution, is currently in surplus thanks to a 
drop in unemployment. 
 
RATIONALIZING PUBLIC SPENDING 
----------------------------- 
¶10. (U) The government initiated a Qgeneral revision of 
public policiesQ a year ago under the direction of 
Budget Minister Woerth to improve the efficiency of 
the public sector and rationalize spending.  Initial 
results from the process will be reflected in the 2009 
budget (due on September 24), and in a first-time 
multi-year document laying out budget prospects for 
2009 Q 2011.  Spending increases will be capped at the 
inflation rate and 30,600 civil servant positions will 
be cut by attrition in 2009.  Given constraints 
imposed by non-discretionary items (debt service, 
pensions, local government transfers, EU 
contributions), the government has indicated that 
 
PARIS 00001626  003 OF 003 
 
 
it will favor education and research, among other 
priorities, in its 2009 budget. 
 
COMMENT 
------- 
¶11. (SBU) The economic slowdown will further constrain 
the GOFQs already limited budgetary maneuvering room, 
and make the goal of a balanced budget by 2012 that 
much more difficult to achieve.  The government is 
clearly serious about holding the line on 
expenditures.  The pressure to limit discretionary 
spending will remain a strong back-story to any effort 
at boosting French international engagement that 
involves new spending commitments.  Over the longer 
term the Sarkozy governmentQs proposed measures are 
likely to improve FranceQs fiscal health, and some tax 
reforms (including to the professional tax and the 
QIFAQ) may help boost competitiveness.  But with 
general government spending still accounting for well 
over 50% of GDP, real fiscal consolidation will 
require stronger action on the expenditure side, 
possibly to include reform of FranceQs multilayered, 
and expensive system of regional and local 
government. 
 
PEKALA