Macron's Tax Promises Challenged by a Weaker French Economy

(Bloomberg) -- The French government cut its prediction for economic growth and raised debt and deficit forecasts, acknowledging a gloomier situation that’s narrowing President Emmanuel Macron’s room to deliver promises.

A weaker expansion than anticipated just five months ago means the budget deficit will be little changed this year, staying close to the European Union limit of 3 percent of economic output, officials at the finance ministry in Paris said as they outlined the framework for the 2019 budget. The debt ratio will hit almost 100 percent.

OutlookApril Stability ProgramSeptember 
2018 economic growth2%1.7%
2019 economic growth1.9%1.7%
2018 deficit (% of GDP)2.3%2.6%
2019 deficit2.4%2.8%
2018 debt96.4%98.7%
2019 debt96.2%98.6%

The tightening constraints come as Macron battles to convince increasingly skeptical French voters that he has the right recipe to boost jobs and growth. To keep the deficit in check, the government has already announced it will cap pensions below inflation in the coming years and delay a planned tax cut for business.

An Odoxa poll released Sept. 11 showed Macron’s approval rating fell 12 points from June to 29 percent.

Macron is also under pressure from the EU to keep within the deficit limit after France got its budget gap below 3 percent last year. The government will present the 2019 budget on Sept. 24.

The fiscal difficulties stem from a slump in growth in the first half amid higher oil prices, bad weather and months of rail strikes. The public finances have also been affected by changes in the accounting of the rail network’s debt and the recapitalization of nuclear firm Orano.

Even to meet its wider deficit forecast for this year, the government is betting on a big rebound in growth in the second half. But industrial production posted solid increases in June and July, and economists surveyed by Bloomberg in August forecast 0.5 percent expansion this quarter.

The finance ministry is confident it will have EU backing for the budget plans, according to officials. The forecasts for structural adjustment to the deficit -- a measure that strips out the impact of the economic cycle and one-offs -- are unchanged from the stability program France submitted to the EU in April.

©2018 Bloomberg L.P.