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In September, we estimated 2012 French growtharound 1.0% (see "French 2012 Deficit: In Control",in Market Mover, 29 September 2011). We also saidthen the government would not only have to reduceits growth forecast, but would also have to implementnew austerity measures to keep the deficit, as ashare of GDP, at the same level. We estimated thenthat around EUR 8bn of new measures would berequired. At present the risks to our growth forecastare on the downside.The measures to stabilise the deficitConsensus Economics also shows that, despite thelower growth, the deficit forecast remained extremelyflat (Chart 3). Economists clearly share our view thatthe government will toughen its fiscal policy to copewith slower growth, as the president and governmentmembers have already said loud and clear. Thisbudgetary policy may also explain why lower growth,which goes hand in hand with a higherunemployment rate forecast and lower wageincrease expectations, does not result in modificationof the inflation forecast. Most analysts probablyexpect fiscal measures to push prices a little higher.However, we can't say whether this refers to thefiscal measures already announced late August andin the draft budget late September, or whetheranalysts expect more adverse fiscal news in thefuture.The government has already announced the easiestand most obvious measures, so the new austeritypackage will be more difficult to put together. Thefact that 2012 is the main election year naturallycomplicates the decision-making process. Thepolitical factor is the main reason we are notexpecting a hike in VAT, although this wouldgenerate the highest income gain (theoreticallyEUR 6bn for 1pp hike in the standard rate andEUR 3bn for the same increase in the reduced rate).A VAT hike, six months before the elections, wouldbe very risky politically. The election factor also limitsthe potential for further indirect tax hikes onconsumption.Opinion polls also indicate that people are lesswilling to accept spending cuts than tax hikes;probably because most people also want tax rises tohit the wealthy, i.e. not them. Potential savings onspending are limited, and these should be usedpreferably around year-end as a last minute lifeline incase of unexpected bad news at that time.We believe the bulk of fiscal tightening will, onceagain, come from a reduction in breaks on taxes andsocial charges (known as "niches fiscales etsociales"). An interesting insight of what could beannounced is provided by the MoF report, prepared1.91.71.51.31.10.90.7Chart 3: Major Consensus Forecastsfor France in 2012 (mean)15 forecasters 18 forecasters 21 forecastersAugust September OctoberSource: Consensus EconomicsCPI (% y/y)GDP (% y/y)Budget Def(% of GDP, RHS)in June 2011, which analysed 385 different schemes,amounting to a total of EUR 96bn. The report gaveeach of them an efficiency (or inefficiency) rating(see "France: The Deficit Target is the Priority", inMarket Mover, 1 September 2011). As much asEUR 10.7bn of the tax breaks were deemedeconomically inefficient and another EUR 27.1bnwere not efficient enough.A large part (EUR 9.8bn) of the least effectivemeasures affect income tax: a modification decidednow would only affect 2013 fiscal income, not the2012 fiscal year. Some of the least efficientmeasures were already reduced or cancelled earlierthis year. Consequently the main source of incomefor 2012 lies with social contributions. The reportmentions EUR 3.1bn of inefficient cuts in socialcontribution and another EUR 9.4bn have a poorefficiency rating. This is where the bulk of theausterity measures can be found.Asset salesThe government may also be willing to increaseasset sales, although the financial context does notlook favourable for restarting the privatisationprogramme. However, the government may try to sellreal estate, buildings and land, since these priceshave not declined much. More immaterial assetsmay also be sold; the current budget includes theproceeds of the sale of radio bands for mobilephones.Since August, the tax increases already announcedamount to EUR 10.5bn or 0.5% of GDP. Another0.3pp to 0.4pp should be presented by the year-end.Given the measures announced in 2010, for thefiscal year 2012, the total tightening from incomeshould reach 1.0pp of GDP. Expenditure restraintswould also reduce the structural deficit by about0.6pp of GDP. With low growth mechanically adding0.5% to the deficit, the 2012 initial target of 4.6% ofGDP should be respected.5.45.25.04.84.64.44.2Dominique Barbet 27 October 2011Market Mover15www.GlobalMarkets.bnpparibas.com