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Europe News

French President François Hollande’s Budget Cuts Force Mayors to Adjust

Government Slashes Financial Support for Towns and Regions by $13.8 Billion

William Horobin

Updated Nov. 6, 2014 3:53 p.m. ET

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SAINT-DENIS, France—In this town in the former industrial heartland outside Paris, Mayor Didier Paillard is straining to deal with the new French reality of austerity.
Until now, cash transfers from the French state made it relatively straightforward for mayors like Mr. Paillard to build, staff and maintain child-care centers, sports facilities and medical clinics.
But halfway through François Hollande ’s five-year term, the socialist President is upending the model by slashing financial support for towns and regions by €11 billion ($13.8 billion) in the next three years in an effort to cut the budget deficit.
In Saint-Denis, one of France’s poorest towns, Mr. Paillard is scrambling to adjust to the shortfall. With little room for maneuver on operating costs, he says he will have to pare investment vital to supporting local jobs and business.
“We are looking at all the savings we can possibly make, but we are already stripped to the bone,” Mr. Paillard said.
The mayor’s alarm call is echoing across France. If the government pushes ahead, investment from local authorities—which accounts for around 70% of total public investment—will drop around 10% next year after a 6% fall in 2014, the national association of mayors says.
In a country where public spending makes up over 56% of the economy, such a decline is set to wield a blow to jobs and growth, businesses warn. Public-infrastructure companies alone will shed 60,000 jobs between now and 2017, according to estimates by France’s federation of public works.
“There is no optimistic scenario. We are in the catastrophe scenario,” said Bruno Cavagné president of the federation.
The stakes are high for Mr. Hollande, who went on national television Thursday evening to discuss his record. He has repeatedly failed to deliver on promises to bring down unemployment, which has surpassed 10% during his presidency and continues to rise. Recent forecasts show the French economy is already vulnerable to cutbacks: the European Union expects barely any French economic growth this year and only 0.7% next year.
Mr. Hollande has also lost the confidence of much of the French public. According to a survey of 1,335 people by pollster BVA to mark the halfway point of his five-year term, only 13% thought the president had a positive record and only 18% said they believed he could remedy France’s woes.
In the interview on French television channel TF1, Mr. Hollande said it wouldn’t be credible for him to stand for re-election if he didn’t manage to bring unemployment down by 2017.
“French people would be merciless, and rightfully,” Mr. Hollande said. He pledged to use the remaining two and half years to continue pushing through overhauls of finances and the economy.
The spending cuts for local authorities mark a shift in policy for Mr. Hollande, who came to power in 2012 promising to fight back against German-inspired austerity in the eurozone. While other countries implemented deep spending cuts to repair their finances, Mr. Hollande instead raised taxes sharply in the summer of 2012 in a bid to pay down the deficit while maintaining the reach and generosity of the French state.
The change of tack comes as Mr. Hollande acknowledged the high-tax policy had reached a limit. The socialist leader is also under pressure from the EU to bring down the budget deficit after France repeatedly failed to meet fiscal targets. The government says the depth of cuts strikes the right balance between the demands of Brussels and the need to sustain economic growth.
But local leaders such as Mr. Paillard warn Mr. Hollande’s bet on spending cuts won’t pay off.
Saint-Denis, a town of about 109,000 people with a poverty rate estimated at 35%, will get around €20 million to €22 million less from the central state in the next three years—the equivalent of a new school.
Mr. Paillard has asked his teams to come up with ideas for spending cuts by the end of the year. He is considering raising the price of school lunches, an unpopular move in a town with 22% unemployment and poverty levels well above the national average.
Local business that depends on public investment will also pay the price, the mayor says. “This is in no way a virtuous circle,” he said. “Bleeding us with austerity isn’t the right remedy.”
Saint-Denis’ entrepreneurs are already feeling the pinch. Philippe Servalli, who runs Saint-Denis Construction—which specializes in renovating and building day care centers and gymnasiums—says his order backlog is evaporating. As companies chase a smaller number of contracts, prices have fallen around 20%.
Unable to hold on for rosier times, he has cut his staff to 70 from around 100 last year and plans to bring the number down to 55 by the end of the year. “It is like riding a bike: if you stop pedaling, you fall,” Mr. Servalli said.
Mr. Hollande argues that his switch to spending cuts will help businesses recover. By cutting spending, he says he will be able to bring down the budget deficit and cut taxes for business, which will spur job creation and investment in the private sector.
Francis Dubrac, who runs family-owned roadwork company Dubrac TP in the Saint-Denis area isn’t convinced. He’s dropped his temporary staff and is counting on a further 5% fall in head count from around 300 currently as some employees retire. “You can give me all the money in the world, but I won’t hire somebody if I don’t have a job for them,” Mr. Dubrac said.
The French government says the impact from the cuts will be limited. Taxes make up 60% of local authorities’ income, and income from those taxes will continue to rise, the government argues. Paris also plans to strengthen systems for redistributing resources from rich to poor towns. But the Saint-Denis mayor and others say they aren’t banking on gaining much from the government measures.
Mr. Paillard wrote to French Prime Minister Manuel Valls in late October to plead the case of Saint-Denis to be exempt from the country’s fight to bring down the budget deficit. But he isn't holding his breath.
“We are trying to get them to give us special funding. For the moment, it hasn’t worked,” Mr. Paillard said.
Write to William Horobin at William.Horobin@wsj.com

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Friday, November 7, 2014

French Mayors Leave for Rome

French President François Hollande’s Budget Cuts Force Mayors to Adjust

Government Slashes Financial Support for Towns and Regions by $13.8 Billion

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