MARKET MOVER - BNP PARIBAS - Investment Services India

France: 2011 Budget to Push CPI Up
• The 2011 budget will be presented next
week. We expect the government to revise down
its estimate of the 2010 deficit-to-GDP ratio, to a
still-conservative 7.8% or so.
• Measures aimed at reducing the deficit to
6.0% of GDP next year will push inflation higher
by between 0.16pp and 0.35pp, depending on
the index.
0.7
0.6
0.5
0.4
0.3
0.2
Contribution to
Headline CPI
Inflation (pp)
Chart 1: Tobacco Prices
Tobacco Price Index
(2000 = 100, RHS)
225
200
175
150
125
100
We now expect the public deficit to come in at 7.5%
of GDP this year, the same as in 2009. Indeed, the
government is likely to revise down the official target
of 8.0% when it presents the 2011 budget next week.
In order to reduce further the deficit next year, to
6.0% of GDP, a number of new measures will be
implemented either at the central government level
(to cut the deficit to an expected EUR 96bn) or to
social security. While some of these measures will
result in higher inflation, the impact will vary
considerably between indices.
0.1
0.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Sources: Eurostat, INSEE, Reuters EcoWin Pro
Chart 2: Core HICP vs. Underlying CPI
2.50
2.25
Underlying CPI (% y/y)
Core HCPI (% y/y)
2.00
1.75
1.50
75
50
Duty increase…at least on tobacco
The first measure is an increase in the duty on
tobacco (a EUR0.30 hike on a packet of 20
cigarettes). This should lead to a rise in retail tobacco
prices of about 6%, similar to last year’s 5.7% when
prices were raised in November. The date for the
increase is still undecided, 4 October, 8 November or
3 January being the most likely. The hike in duty will
contribute 0.1pp to headline inflation (0.10pp to the
domestic index, where tobacco has a 1.75%
weighting and 0.11pp to the HICP, where the
weighting is 1.91%), although the base effect will
mitigate this impact; the date when it becomes
effective may cause some short-term volatility.
Other duties could also be increased, but this is not
our base scenario. Diesel fuel would be next in line,
in our view, with any rise likely to come on 1 January.
VAT rules on communication services
The government has said it aims to close tax
loopholes in the amount of EUR 10bn in the 2011
budget (with the financial impact being visible either
in 2011 or 2012). Amongst these measures, some
changes will affect VAT and thus inflation. The ISPs
that currently offer triple-play services (phone,
internet and cable TV, usually for EUR 29.90 a
month) will have to apply the normal 19.6% VAT rate
from January 2011. The 5.5% reduced VAT rate that
applies to pay-TV (as a cultural service) will remain
1.25
1.00
0.75
0.50
0.25
0.00
98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
VAT Cut
(home repair)
VAT Cut
(restaurants)
only for pure players. To date, the highly popular
triple-play offers have been taxed half at the normal
rate and half at the reduced rate, something the
European Commission has complained about. The
same applies for mobile phone contracts that include
access to mobile TV as well as for the emerging
quadruple-play (which also includes mobile phone
service). This tax change will mechanically add
6.26% to the price. Although the market is highly
competitive, ISPs say they will pass on the VAT hike
in the final bill (i.e. EUR 1.87/month). We estimate
this will add 0.13pp to headline and ex-tobacco CPI
inflation, a little more to HICP. Given that mobile
phone operators (often the same players as the
ISPs) also have to pay a new tax on antennae, they
may raise prices a little more than the impact of the
VAT hike alone would warrant.
The VAT increase will also add some 0.20pp to core
HICP. However, since the domestic underlying
Dominique Barbet 23 September 2010
Market Mover
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