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France slices outlook to tackle deficit

In a statement issued after Sarkozy held emergency talks with senior ministers on the 2011 budget, the government said it would eliminate €10 billion in tax breaks and pledged to avoid unpopular increases in income, value-added and corporate taxes.

Sarkozy, whose popularity is near record lows ahead of an election in 2012, convened the talks with Prime Minister Francois Fillon and Economy Minister Christine Lagarde just days after Moody’s ratings agency warned that France — and several other top-rated nations — was inching closer to losing its AAA rating.

Sarkozy’s conservative government has told Brussels it will reduce its deficit from around eight per cent of GDP this year to three per cent by 2013 — implying some €100 billion in savings. It has yet to detail where much of those savings will come from.

“The president said that cutting the public deficit to six per cent of GDP by 2011, whatever the level of economic growth, is the main objective of the country,” said the statement from the Elysee presidential palace. “Reducing the deficit must be achieved by cutting public spending as a priority. Neither income tax, VAT or corporate tax will be increased.”

The government said France would meet or exceed its 1.4 per cent target for growth this year, after the economy accelerated to a better than expected 0.6 per cent in the second quarter. However, economists expect expansion to cool off in the second half as stimulus measures expire.

Constrast with Germany

The reduction in France’s 2011 growth forecast, previously 2.5 per cent, came just a day after the Bundesbank raised its 2011 growth forecast for Germany to three per cent from two per cent, underscoring the divergence of the eurozone’s top economies.

“The underlying pace of recovery is very different in Germany,” said Gilles Moec, an economist at Deutsche Bank. “We should continue to see outperformance by Germany in the second half of the year.”

Analysts had warned that France’s over-optimistic growth forecasts — it had been predicting 2.5 per cent for 2011 and the following two years — was a major obstacle to drafting a credible deficit cutting plan.

For every 0.1 percentage point that growth misses the government’s 2.5 per cent growth forecast next year, France will have to find roughly €1 billion more to cover lost revenues