UPDATE 3-France plans spending cuts as fiscal targets slip

Wed Apr 17, 2013 10:34am EDT

* Multi-year budget plan to bring forward structural surplus

* New programme key for Hollande's fiscal credibility

* France plans 14 bln euro spending cuts in 2014, 6 bln euro more taxes

By Ingrid Melander and Nicholas Vinocur

PARIS, April 17 (Reuters) - The French government said on Wednesday it would have a higher-than-planned public debt and deficit throughout its mandate but hoped to appease EU partners with spending cuts that will bring the underlying budget to surplus in 2016.

Paris is battling to persuade the European Commission and euro zone leaders to grant it more time to knock its finances into shape after it conceded earlier this year it would break a pledge to cut its deficit to 3 percent of output in 2013.

In a new set of projections taking account of its weakening economy, the government set its headline public deficit target for 2017, at the end of its five-year term, at 0.7 percent of output, up from an earlier goal of 0.3 percent.

But at the structural level - a measure that strips out the impact of the economic cycle and which the European Commission has said is valid - the plan envisages a budget surplus of 0.2 percent of output in 2016 and 0.5 percent in 2017.

The already unpopular government, which fleshed out on Wednesday plans for 6 billion euros in extra taxes and 14 billion in spending cuts for 2014, says imposing harsher measures on the stagnating economy would be counter-productive.

It plans no further tax increases from 2015 onwards, meaning the fiscal tightening will hinge on cutting spending.

"We are sticking completely to our plan, which is indeed aimed at cutting the deficit ... but which is above all an effort to put the country back on its feet, to restore competitiveness, growth and jobs," Finance Minister Pierre Moscovici said after presenting the projections to cabinet.

President Francois Hollande's government has pruned back its shorter-term forecasts to reflect a more pessimistic growth outlook.

But with consumer spending drying up and company investment stalled, many see even the weaker growth goals as optimistic, casting some doubt on the new deficit targets.

The budget plan, presented at a cabinet meeting on Wednesday morning, will be sent to parliament next week and then reviewed by the European Commission at the end of May.

CRISIS

The budget plan will be crucial in persuading France's euro zone partners to grant it more time to meet the 3 percent target, while debt-holders are watching for signs of more slippage on budget and growth estimates.

The government is basing its new fiscal plan on growth forecasts of 0.1 percent this year, 1.2 percent next year and 2 percent on average in 2015-2017.

However, the International Monetary Fund sees France contracting by 0.1 percent this year and economists polled by Reuters see a slightly deeper recession that would push the 2013 public deficit to 3.8 percent of GDP.

The European Commission, which will publish its own updated economic forecasts early May, did not comment on Wednesday's plan beyond stressing that France must push ahead with reforms to boost its competitiveness.

The Commission said in February it could be lenient if the economic outlook worsened, as is the case, and if Paris sufficiently cut its structural deficit.

Asked about Wednesday's data during a news conference in Berlin, German Chancellor Angela Merkel, whose lenience is particularly sought by Paris, said she wished France success because of its importance for euro zone stability.

The new plan also showed that France's public debt will peak a year later than first planned, in 2014. It will reach 94.3 percent of GDP in 2014 from a previous 90.5 percent target before starting to fall in 2015.

Still, government bond yields have so far been unharmed by the state's fiscal troubles and are at record lows, with Paris attracting yield-hungry investors looking for more safety than in the euro zone periphery.

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