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2 Economic and Financial Outlook Draft Budget Bill for 2008 Presented by: Philippe Bouyoux Director of Economic Policies Benoît Coeuré Chief Executive of Agence France Trésor Philippe Josse Director of the Budget 26 September

3 Economic Environment Fiscal Policy Budget Bill for 2008 Government Funding Programme 3

4 Macroeconomic Outlook Philippe Bouyoux Director of Economic Policies 4

5 Growing uncertainty in the international environment? 1,40 1,30 1,20 in $ 1. Euro and Brent in $ 2. United States q-o-q (%) in % Residential investment 5,5 5,0 1, ,5 1,00 0,90 0,80 Brent Last point : september Default rate on mortgage loans Last point : 2007Q ,0 3,5 3% y-o-y 3. Germany q-o-q 3% 60 in % 4. Implicit volatility in the stock market 2% Compensation per employee 2% 50 EuroStoxx 50 1% 1% 40 0% -1% Private consumption VAT increas e -2% % -1% -2% S&P 500 Last point : september 20th,

6 France : encouraging signs from short-term indicators? y-o-y 14% 1. World trade In thousands, per semester Job creation (non-farm private sector) 12% 10% World trade 150 8% 100 6% 4% 2% French export market Last point : 2007Q FEM mean = 6,3% m-o-3m 2,5% 3. Consumption in manufactured goods q-o-q 2,0% 4. Industrial production q-o-q 8% 2,0% 1,5% 1,0% 1,5% 1,0% 0,5% 0,0% Manuf. 6% 4% 2% 0% 0,5% -0,5% -2% 0,0% Last point : august ,5% ,0% Car industry Last point : 2007Q3 (carry over) -1,5% % -6% 6

7 Business surveys hold at a quite high level 130 Business surveys Industry Services Last point : july,

8 A resilient international environment 6% y-o-y GDP growth World Forecasts 5% 4% USA 3% 2% Euro area 1% 0%

9 Main results GDP USA GDP Euro area Forecast annual growth rate in % 2,9 1,8 2,2 2,8 2,6 2,3 France GDP* ½ 2-2 ½ Households consumption ½ Corporate investment 4 4 ½ 4 ¾ Exports 5 ½ 3 ½ 5 ¾ Imports 6 ¾ 4 ½ 5 ½ Consumer prices 1,6 1,3 1,6 Private employment Total employment yearly change at the end of the year, in thousands *Rounded to the closest quarter percentage point 9

10 An accelerating household consumption 6 annual growth rate in % Consumption, income and savings % of gross disposable Income Forecasts Households saving rate (right scale) Households consumption Households purchasing power 10

11 Business investment remains strong Investment and added value In % In % 12 Forecasts Added value Corporate Investment

12 Exports are expected to grow in line with world trade annual growth rate in % Econometric contributions to exports of manufactured goods Forecasts of world trade..of competitiveness exports..of geographic orientation..of the unexplained 12

13 Food price inflation: a limited impact on consumer prices 2,5 2,0 % 1. Total inflation and core inflation Forecasts Energy prices contribution 4 3 % 2. Econometric contributions to compensation per employee growth Forecasts Consumer price index Unemployment rate 1,5 1,0 0,5 2 Administered prices contribution 1 Total inflation 0 Minimum w age 2001 dummy 0,0 Core inflation -1 Unexplained -0, Compensation per employee % Main core inflation components Forecasts Other manufactured goods Retail prices 4,0% large retail stores 2 Other services other stores Food excl. fresh food and meat 90 Last point : august

14 How healthy is the corporate sector? 1. Breakdown of non financial corporate gross saving rate % of value added Forecasts 40% 30% 20% % of value added 25% 20% 2. Non financial corporate saving, investment and net lending Forecasts 100% 90% 80% 10% 0% -10% -20% Gross operating surplus Net property income % of value added Others (incl. direct taxes) Gross saving rate 3. Non financial corporate debt* Base 95 Base *Gross financial debt / gross value added Forecasts 70% 15% 60% 10% 50% 40% 5% 30% Saving Investment Net lending (right-hand scale) % of gross 4. Non financial corporate insolvency ratio* operating surplus Forecasts 50% 45% 40% 35% 30% 25% 20% * Interest payment / gross operating surplus 14

15 Alternative scenarios High scenario : an acceleration in structural productivity of euro area to boost growth Productivity growth at a higher pace until the end of the decade, thus increasing potential growth Long term interest rates decline strengthens final demand + 0,5 percentage point of growth in 2008 Low scenario : rising tensions on credit markets to dampen world growth Strong tightening of financial conditions, fall of equity prices Investment and consumption decrease - 0,5 percentage point of growth in

16 Fiscal Policy Philippe Bouyoux Director of Economic Policies 16

17 Key public finance figures % of GDP Public balance* Compulsory levies , Public spending real growth** 2.1% 2.0% 1.4% Public debt * According to the Maastricht Treaty e.g. including swap gains ** Deflated by the consumer price index excluding tobacco 17

18 Change in compulsory levies Compulsory levies 44.2% 44.0% 43.7% Contribution of new levies Of which tax reductions brought by the 2007 labor, employment an dpurchasing power act 0.0% -0.7% -1.5 bn -0.4% -6.8 bn Contribution of spontaneous change 0.4% 0.5% 0.1% Spontaneous GDP elasticity of net tax receipts Spontaneous GDP elasticity of compulsory levies

19 GDP elasticity of net tax receipts 3 2,5 2,5 forecast 2 2,0 1,5 1,7 1,7 1,3 1,6 1,3 1 0,5 0-0,

20 New compulsory levies for 2008 million Sub total labor, employment and purchasing power Act Overtime tax exemption Tax shield extended to 50% -625 Income tax deductions relating to debt interest payments -220 Reduction in inheritance taxes Wealth tax (ISF) -530 Tax exemption on wages paid to students -40 Sub total central government budget bill for Witholding tax on dividends 600 Income tax deductions relating to debt interest payments -220 Other 45 Sub total social security budget bill for Contribution from dividends Benefits paid for retirements 300 Other 375 Sub total other measures Occupational tax reductions Other Total

21 Structural balance breakdown % of GDP Public balance Public balance: annual change Cyclical balance: annual change Structural balance: annual change Structural balance excluding one-off payments: annual change

22 Public debt General government debt (% of GDP) SAAD revision

23 2007: public deficit reduction from 2006 Public deficit: 2.4% of GDP e.g. 0.1 point reduction from 2006 Public expenditure: 0.2 GDP point Receipts: Of which spontaneous change in compulsory levies Of which new compulsories levies -0.1 GDP point 0.5 GDP point -0.7 GDP point 23

24 2008: continued reduction in public deficit Public deficit: 2.3% of GDP e.g. 0.1 point reduction from 2007 Public expenditure: 0.6 GDP point Receipts : -0.4 GDP point Of which new compulsory levies -0.4 GDP point 24

25 Financing requirement by general government sub-sectors % of GDP General government State Other central government agencies Local government Social security

26 On-going improvement of the social security balance Receipts* (growth rate in %) Benefits (growth rate in %) Social security balance * (% of GDP) * The 2006 figure is ajusted for the 2005 one-off payment from gaz and electricity utilities 26

27 Public finance multi-year projections Low scenario GDP growth Public deficit -2.4% -2.3% -1.7% -1.2% 2.5% -0.6% 0.0% Debt ratio 64.2% 64.0% 63.2% 61.9% 60.2% 57.9% High scenario GDP growth Public deficit -2.4% -2.3% -1.3% -0.3% 3% 0.5% 1.3% Debt ratio 64.2% 64.0% 62.5% 60.0% 57.2% 53.4% 27

28 Budget Bill for 2008 Philippe Josse Director of the Budget 28

29 Outline of the 2008 budget bill Strengthen central government finance The deficit is slightly improving in comparison with 2007 ( 0.3bn), despite an increase in expenditure inherited from the past + 1.6bn debt service + 2.0bn pensions (employers contribution) Expenditure under control retiring civil servants not replaced More efficient employment policy Involvement of local authorities in the global effort Boost growth and prepare the future Enforcement of the labour, employment and purchasing power act (reduction in state receipts: 8.9bn) Increase in the means dedicated to higher education and research (+ 1.8bn) 29

30 billion Outline of the 2008 budget bill 2007 budget act 2008 budget bill (current) General budget expenditure (A) Payroll expenditure Debt and guarantees Other expenditure State receipt restitutions (B) To the European union To local authorities State receipts Net tax receipts Non tax receipts General budget balance (C-B-A) Budget balance

31 Strengthen central government finance contained deficit Budget balance ( billion) Budget act ( ) / Budget bill 2008 Budget outturn (forecast for 2007) 31

32 Strengthen central government finance expenditure under control Change in state expenditure (pro forma increase on a broadened basis) 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% 2.6% 2.0% 1.6% nominal growth (average) 2007 budget act 2008 budget bill 1.1% 0.2% real growth 0.0% The 2008 budget bill results in an even increased effort to contain spendings. Calculated on a broadened basis (general budget + state receipt restitutions), the pro forma increase in spendings is limited to 1.6% in 2008 (0% in real terms). The effort is even more important than in 2007 (+0.2% in real terms) and, more significantly, than over the period (+1.1% in real terms on average). 32

33 Strengthen central government finance retiring civil servants not replaced Change in the state payroll (in thousands) budgetary payroll full time equivalent The replacement of only one out of two retiring civil servants, except for education (one out of three), leads to a decrease of posts in This policy does not apply to prioritary ministries (Justice, Research)

34 Strengthen central government finance retiring civil servants not replaced Change in the state payroll (in thousands) National education Defence Budget, public accounts and the civil service Interior, overseas France et local authorities Ecology, sustainable planning and development Justice Others ministries 34

35 Strengthen central government finance change in expenditure by type billion budget bill Change of 2008 budget act basis 2007 perimeter budget bill General budget payroll expenditure Earned remuneration Pensions (employers contribution) Other Debt and guarantees Other general budget expenditure Operating expenditure Capital expenditure Intervention expenditure Other State receipt restitutions To the European union To local authorities The 5.5bn increase in expenditure (unchanged perimeter) includes 3.5bn inherited from the past (debt and pension liabilities) 35

36 Strengthen central government finance involvement of local authorities in the global effort Change in state receipt restitutions to local authorities (increase in nominal terms, unchanged perimeter) 7% 6% 5% 4% 3% 2% 1% 6.1% 4.2% (average) 2007 budget act 2008 budget bill 1.2% State receipt restitutions constitute the main way of financing state supports to local authorities. The change in the indexation rules of the regulated part of these amounts entails a strong slowdown of state receipt restitutions in 2008 (+1.2% in nominal terms, with an unchanged perimeter). 0% -1% 36

37 Boost growth and prepare the future increased expenditure for the future State expenditure for the future ( billion) budget act 2008 budget bill investment (excluding military equipment) research and higher education The global effort to bring state expenditure under control enables to strengthen spendings for the future, made to reinforce the potential growth of the French economy (investment excluding defence, research and higher education). 39bn are listed in the 2008 budget bill, e g. 2.3bn more than in the 2007 budget act (+5.9%). 37

38 Boost growth and prepare future fiscal policy Change in tax receipts between 2007 and 2008 (budget act for 2007, budget bill for 2008, billion) spontaneous growth -9-3 Labour, employment and purchasing power act 6 effective growth The spontaneaous growth of tax receipts (+ 18bn in comparison with the 2007 budget act, only + 14bn compared with the latest 2007 forecast) is based upon the conservative assumption that the elasticity to GDP amounts to 1.3, far lower than the one recorded in 2006 (2.0) and expected in 2007 (1.6). Reductions in compulsory levies amount to 12bn, including 9bn according to the labor, employment and purchasing power act, and 2bn to compensate for occupational tax reductions resulting from the 2006 budget act. 38

39 Government Funding Programme Benoît Coeuré Chief Executive of Agence France Trésor 39

40 Funding programme: Financing requirement billion 2008 (Budget bill for 2008) Long-term debt redemption 41.3 Medium-term debt redemption 61.5 Other commitments by the State 0.4 Budget deficit 41.7 Total financing requirement

41 Funding programme: Financing sources billion 2008 (Budget bill for 2008) Medium- and long-term issues (OATs and BTANs) net of buybacks Cancellation of Government securities by the Public Debt Fund (Caisse de la dette publique) 3.7 Net change in Treasury bills (BTF) outstanding 22.3 Change in Treasury correspondents deposits -2.7 Change in Treasury account and others 2.1 Total financing sources