In June 2010, the French government announced some measures to reduce the deficit and comply with its European commitment of bringing it down to 3% of GDP (from our estimate of 7.6% of GDP this year). The measures represent 0.7% of GDP in 2011, and then an additional effort of 0.2% of GDP in 2012 and 2013.

Between a half and two thirds of the measures are to be found on the tax receipt sides, but these measures remain to be defined. The reason for focusing on the tax receipt side is that tax receipts had fallen following a series of tax exemption increases (especially when the government put in place a cap on public expenditures).

Tax exemptions are multiple in France, and estimated to cost the state coffers more than EUR 70bn. At the same time, tax receipts as a share of GDP are among the highest of the OECD countries, so that it seems difficult to increase tax rates but much less so to increase the tax base, especially through the reduction of tax exemptions.

As the government has not specified yet which fiscal exemptions would be reduced or suppressed (the Draft Budget Law is generally published at the end of the third week of September), it is likely that we will see several media reports well into September discussing the possibilities of some tax exemption reductions. On Sunday, the JDD said the government would not reduce the VAT reductions granted last year to restaurants.

Earlier in the month, the media reported that the fiscal reduction granted to interest payments on housing mortgages credit (around EUR 3bn) could be suppressed but replaced by an extension of the state-supported housing credit scheme (for an estimated cost of around EUR 2.6bn). In June, the proposed pension reform (to be voted on in the autumn) included the suppression of fiscal reductions for dividends (about EUR 640mn).

This morning Les Echos published a report showing that fiscal exemptions devoted to supporting financial household savings cost about EUR11.5bn, for a total of such financial saving of EUR 200bn. Fiscal exemptions granted to investment in financial products, or corporate saving schemes for their employees, or venture capital, could thus be some of the targets for fiscal exemptions.

Overall the government is looking to save EUR 25.5bn through fiscal exemption reductions by 2013.

Laurence Boone wrote in a Barlcays Capital Research report.