PARIS, July 8 - The OECD cut its growth forecasts for France sharply in a report released on Tuesday and said reducing state expenditure should take priority over tax cuts as the public sector deficit is set to swell further this year. In an extensive study of economic activity and public spending in France, the Paris-based Organisation for Economic Co-operation and Development (OECD) forecast growth of less than one percent this year after predicting 1.2 percent in April. Growth would rise in the second half of 2003 as firms put delayed investment projects into action, the OECD said, but it saw growth reaching a rate of only around two percent in 2004. In April, it forecast 2.6 percent for next year. "While the average growth rate for 2003 should be less than one percent, corporate and household balance sheets remain in good shape, suggesting that, as international uncertainty dissipates, growth could accelerate, reaching a rhythm of about two percent during the course of 2004," the body said.
The deficit was set to swell further this year after hitting 3.1 percent of gross domestic product (GDP) last year -- already in breach of a European Union limit of 3.0 percent -- and urgent action was needed to reduce spending. "Unfortunately, even taking into account decisions to cancel some state budget credits and to create an additional reserve, the OECD expects the deficit to exceed 3-1/2 percent of GDP in 2003," the think-tank said in the study. "Unless steps are taken now there is a real risk that the accumulation of deficits would increasingly force France to cut into programme spending just in order to service the interest charges on the debt," the OECD added.
TAX CUTS THREATEN DEFICIT
France's centre-right government has vowed to push ahead with pledged tax cuts in an effort to foster economic growth, despite being told by European Union peers that it must work harder to cut its deficit. But the OECD warned efforts to induce growth by cutting taxes risked exacerbating the deficit. Measures to control public spending must come first, it said. "While reducing taxes is likely to help spur growth, priority must be given to expenditure reduction," the OECD said. Rushing to cut taxes risked increasing France's debt burden and aggravating the difficulty in financing increased demands on the country's pension and health care systems as the country's population grows older. "Implemented prematurely... (tax cuts) risk exacerbating debt dynamics and making the overall cost of dealing with the ageing of the population more costly," the OECD said. Prime Minister Jean-Pierre Raffarin promised only last week to stimulate growth next year with further tax cuts. Since taking office last June, Raffarin's government has cut income tax rates by six percentage points.
The growth forecast chimed with a prediction from the International Monetary Fund (IMF) on Monday for the French economy to gain strength gradually over the remainder of the year and grow at about two percent in 2004. To promote growth, France needed to reduce the cost of hiring young and low-skilled workers, while keeping older people at work by cutting back on state income support and introducing incentives for people to work later in life, the OECD said. Further privatisation would also help boost growth, as would measures to raise investment and productivity -- an area where current efforts to reduce red tape were positive, the OECD said.//