PARIS Prime Minister Jean-Marc Ayrault slashed France's official growth forecasts on Tuesday, paving the way for a slew of cuts next year that are bound to anger many after the new Socialist government promised to avoid austerity.
In response to a grim assessment of public finances by the state auditor on Monday, Ayrault said the economy was set to grow by only 0.3 percent this year, less than the 0.7 percent that the previous conservative government had envisaged.
For 2013, Ayrault said growth would be higher - at 1.2 percent - but still well below the previously slated forecast of 1.75 percent.
"We knew the 2012 budget included under-assessments of spending and over-optimistic estimations of revenues," Ayrault said in a speech to parliament. "The Court of Auditors has confirmed what we feared. The situation is serious."
With France's triple-A credit rating already cut by Standard & Poor's in January, other rating agencies are watching the new government closely to see that it is serious, despite its socialist ideals, about finding ways to hit its deficit targets.
Blaming the sickly economy on the previous conservative administration, Ayrault said President Francois Hollande's government would tackle the problem by focusing on getting France's economic motors running again rather than resorting to sweeping austerity cuts.
Spelling out policy plans for the coming five years, Ayrault confirmed campaign pledges by Hollande that more teachers and police would be hired, that 150,000 state-aided jobs would be created and that competitive industries would be promoted.
To help industrial innovation, a public investment bank would be set up before the end of this year, he said.
While Ayrault denied the government would drop its opposition to austerity cuts, sticking instead to plans to raise taxes on the wealthy from later this year, Monday's audit suggested that sweeping cuts will be inevitable next year.
The Court of Auditors said the government needs to find budget savings next year worth some 33 billion euros ($41.5 billion) in order to reach a European Union budget deficit goal of 3 percent of gross domestic product.
Next year's adjustment - including an additional one-off charge of 5 billion euros to cover tax repayments to foreign investment funds mandated by a recent EU ruling - could total an unprecedented 4 percent of state spending.
That comes on top of 6-10 billion euros in budget savings the Court of Auditors said was required this year for France to achieve a deficit of 4.4 percent of GDP, included in a multi-year budget plan sent to Brussels.
With its debt already due to exceed 90 percent of GDP in 2012, a level at which economists say it starts to sap economic growth, France risks being sucked deeper into Europe's debt crisis unless it stuck to its targets, the auditor warned.
Ayrault confirmed the government will overturn an increase in the sales tax rate due to kick in this October and would go ahead with plans to separate banks' retail and investment arms.
He also confirmed a new 75 percent tax band would be imposed on annual income above 1 million euros, while promising low-income and middle-class workers would be spared tax rises.
Ayrault's speech was to be followed by a confidence vote that the government should win, given its comfortable majority in the lower house of parliament since a June 17 election.
Earlier on Tuesday, Finance Minister Pierre Moscovici said France would meet its target of cutting its budget deficit to 4.5 percent of GDP this year but warned it would need amendments.
(Writing by Catherine Bremer; Editing by Andrew Osborn)