French Prime Minister Warns of Cuts to Tame Its 'Volcano' of Debt

By William Horobin Features Dow Jones Newswires

French Prime Minister Edouard Philippe on Tuesday warned that the country is reeling under an "unbearable" debt burden and pledged austerity measures in a speech outlining policies for President Emmanuel Macron's five-year term in office.

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Mr. Philippe was addressing the French National Assembly for the first time since his appointment in May and since the election of a commanding majority for Mr. Macron in June's legislative elections.

Mr. Macron's presidency lost some of its élan last week when state auditor Cour des Comptes said there are gaping holes in the country's finances, making it tougher for the newly elected French leader to deliver his election promises. According to the auditor, France will not meet the European Union's target of a deficit under 3% of economic output this year, as the previous government had pledged.

"We are dancing on a volcano that is rumbling louder and louder," Mr. Philippe said.

Repairing France's public finances is a key plank of Mr. Macron's economic strategy both at home and on the Continent. The centrist leader is pushing Germany and Chancellor Angela Merkel to accept a greater sharing of the burden by eurozone states, pledging in return that France will revamp its labor laws to make the jobs market more flexible and will respect EU budget rules after years of missing targets.

Mr. Philippe said his government will cut spending to meet the 3% deficit target this year, and make further cuts to reduce spending by 3 percentage points of economic output over the course of Mr. Macron's five-year term. The public sector payroll will be contained and no part of the budget will be spared from the search for savings, Mr. Philippe said, noting in particular France spends more than its peers on housing and job training programs.

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"France has an addiction to public spending, which, like any addiction resolves none of the problems it claims to," Mr. Philippe said.

Mr. Philippe, who comes from the center-right Les Républicains party, said the government will still deliver Mr. Macron's election pledges on investment and tax cuts, including a EUR50 billion investment program focused on health and renewable energy, and gradual reductions in corporate and payroll taxes.

But the prime minister said changes to wealth taxes and a tax credit system for employers would not come into effect until 2019. Over the whole five-year term, taxes will fall by 1 percentage point of economic output, he said.

France's largest business lobby, Medef, said it regretted the delay of measures to cut the cost of employment.

"The catastrophic state of our public finances should encourage speedy and determined action," said Medef chief Pierre Gattaz.

Mr. Philippe also drew criticism from leftists. Jean-Luc Mélenchon, the leader of the far-left group in the National Assembly, said the policies unveiled by the government amounted to following austerity instructions from Germany that would destroy France's public services.

Referring to the German chancellor, Mr. Mélenchon said, "We didn't elect Ms. Merkel."

Write to William Horobin at William.Horobin@wsj.com

(END) Dow Jones Newswires

July 04, 2017 15:00 ET (19:00 GMT)