September 13, 2019 / 8:05 PM / 5 days ago

France to slow reduction in deficit despite lower borrowing costs: Finance Ministry sources

PARIS (Reuters) - France will cut its public sector deficit by slightly less than planned next year despite billions of euros in windfall savings from record low borrowing costs, Finance Ministry sources said on Friday.

The French government will present a draft 2020 budget at the end of the month showing a deficit of 2.2% of gross domestic product after 3.1% this year, the sources said.

Paris had informed Brussels in April that it expected a 2020 deficit of 2.0%, but already in June nudged that estimate up to 2.1% after President Emmanuel Macron promised more tax cuts in response to the yellow vest anti-government protest movement.

Since its April estimates, the finance ministry has had to budget for a further 5 billion euros ($5.54 billion) in income tax cuts and the cost of 1.5 billion euros from re-indexing small pensions to inflation.

“It was totally justified to respond to the yellow vest movement with a package while sticking to our policy fundamentals that are favorable to companies, making work pay and cutting taxes,” one of the sources said.

The combined 6.5 billion euros in extra strain on the budget would be only partially offset by savings from lower than expected debt servicing costs, explaining the wider deficit next year, a second source said.

With borrowing costs at record lows this year, the government expects to reap 3 billion euros in savings from lower than expected debt servicing costs this year versus the 2019 budget law and a further 8 billion euros next year.

France has issued benchmark bonds recently with maturities out to 15 years at negative yields as government bond yields plunged in anticipation of fresh easing by the European Central Bank in the face of weak euro zone growth and inflation.

France has stood out in the euro zone this year for its relatively resilient growth, which is less affected by global trade tensions than countries like export-dependent Germany.

The Finance Ministry only marginally revised down its 2020 growth forecast, trimming it to 1.3% from 1.4%. The ministry kept its forecast for this year at 1.4%.

Reporting by Leigh Thomas; Editing by Gareth Jones

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