France's Sarkozy eyes welfare rethink, fraud clampdown

BORDEAUX, France (Reuters) - President Nicolas Sarkozy branded welfare fraud a "betrayal" of national principles on Tuesday and said France needed to rethink the way its benefit system was financed in order to ease the burden on employers.

The financing of the welfare system, one of the world's most generous, has become a hot issue ahead of a presidential election next April due to worries about the health of public finances and a parliamentary report pointing to billions of euros being lost every year because of fraud.

"We must have no tolerance for cheaters and fraudsters," Sarkozy told supporters in the southeastern city of Bordeaux. "Cheating -- and I mean stealing from the social security system -- is stealing from each and every one of us, and each and every one of you."

The president's comments came as France faced heavy pressure from global markets, a reflection of the fear the economy could be sucked into a spiraling debt crisis.

Sarkozy said fraud was "the most terrible and insidious betrayal of the spirit of 1945," referring to the patriotic ethos of the French resistance movement against Nazi occupation.

The parliamentary report, published earlier this year, estimated the French state loses 20 billion euros ($27 billion)per year to welfare fraud, much of it due to employers failing to pay social fees for their workers.

Announcing the creation of a "high commission" on the financing of welfare, Sarkozy said France's current system of levying social fees on salaries -- as opposed to taxes on consumption, for example -- was dragging on France's economy.

"We need to have a calm debate," he added.

A long-running discussion in France on shifting part of the burden for social fees onto consumers -- through a so-called social value-added tax -- did not given rise to any plans for reform in the 2012 budget cycle.

But Finance Minister Francois Baroin has hinted that debate on the "social VAT" may come back to the fore ahead of the presidential election in 2012.

While Sarkozy's conservative government has announced measures to tighten surveillance of fraud, including the creation of a national register of welfare beneficiaries, many people who are tasked with applying penalties say they are rarely enforced in practice.

The government, which hopes to keep supporters from defecting to the far-right National Front will hold a public debate on the welfare question by year-end, Sarkozy added.

France, under pressure from markets to trim its budget deficit, has unveiled two rounds of belt-tightening in the past three months but so far avoided cutting into public spending or making significant cuts to benefits.

A Harris Interactive poll on Tuesday showed that nearly two thirds of the French were willing to cut back on household spending. But a similar proportion said they objected to any reduction in public spending on schools, healthcare or pensions.

(Reporting By Yann Le Guernigou, additional reporting and writing by Nicholas Vinocur; editing by Matthew Jones)