September 22, 2017 / 2:30 PM / in a month

Macron puts fiscal credibility on the line with first budget

PARIS (Reuters) - When Emmanuel Macron’s government delivers the first budget of his presidency on Wednesday, it must convince France’s European partners it is serious about cutting spending while reassuring voters they do not face austerity.

French President Emmanuel Macron waits for a guest at the Elysee Palace in Paris, France, September 22, 2017. REUTERS/Gonzalo Fuentes

To be taken seriously by Germany and other euro zone countries, Macron has to map out a credible path for getting France’s finances permanently in line with EU rules, after his predecessors flouted them for a decade.

Macron is expected to lay out his much-awaited vision for deepening integration among euro zone countries on Tuesday, the eve of the budget presentation and only two days after Germany’s election.

“If France wants to convince Germany to move toward greater integration at the European level, President Macron must show that France can fulfill its commitment,” Societe Generale economists wrote in a research note.

The International Monetary Fund said on Thursday Macron’s success in overhauling the economy would hinge on reining in government spending, the highest among developed countries at over 56 percent of gross domestic product.

The government this week scaled down its planned budget cuts for next year to 16 billion euros ($19.15 billion) from 20 billion euros.

Tax revenues are expected to be higher than previously thought thanks to a slightly better growth outlook. The government also needs to keep voters from getting anxious about spending cuts as it pushes through its reform agenda.

Ten billion euros in tax cuts next year will dull the impact of spending cuts on reducing the overall public deficit.

The government expects to get the deficit below the three-percent-of-GDP threshold set by EU rules this and next year, but not mainly by spending restraint.

Most of the reduction in the overall public sector deficit will come from a growing surplus on the social security accounts, a government document obtained by Reuters showed.

France has violated the three-percent rule every year since 2007. The government said this week it expected a public sector deficit of 2.9 percent in 2017, falling to 2.6 percent in 2018, thanks in part to better growth prospects.

A budget in line with the European limit for two years would set France up to exit the EU’s excessive deficit procedure.

While ministries in charge of education, the police and the environment will see budget increases, the government has flagged cuts to the 40 billion-euro budget for housing support as well as on infrastructure and subsidized jobs.

So far it has not committed to any hard and fast numbers on cuts, ensuring that the budget will be closely scrutinized by France’s EU partners.

Editing by Andrew Roche

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