Sarkozy can't spend his way out of trouble

By Anna Willard

PARIS (Reuters) - Angry students, mayors of riot-hit suburbs and consumers suffering from rising prices are demanding money from French President Nicolas Sarkozy, but slow growth and tax cuts means he does not have enough to give to them.

In poor Paris housing estates where youths clashed with police this week, officials say they need more cash to tackle unemployment and improve schools and housing.

Students blocking universities want extra money to back education reform. Transport workers who went on strike this month want higher salaries to compensate for pension cuts.

Consumers are also waiting for a set of measures that Sarkozy promised to announce when he returned from his trip to China this week to put money in their pockets.

"There is no more money. The government has to find solutions that don't cost anything," said Nicolas Bouzou, economist at Asteres consultancy.

The 2008 budget will include some 9 billion in euros in tax cuts Sarkozy had promised during his election campaign to help homeowners, students and encourage overtime work.

But economists warn if the government spends any more money it will send the deficit soaring, hurt the economy and draw more fire from the European Union.

The government is predicting a deficit of 2.3 percent of gross domestic product next year, down from 2.4 percent in 2007.

But that is based on a growth forecast of 2.0 to 2.5 percent which economists and the European Commission say is unrealistic.

"The budget for next year is very tight. We're now estimating they will overshoot the budget by a huge margin giving a deficit of 3.1 percent," said Alexander Law, economist at Xerfi consultancy.

Breaching the European Commission's 3.0 percent deficit limit when France takes over the EU presidency next July would be an embarrassment that would undermine French credibility and could sap appetite for spending on new EU projects.

FOOD AND FUEL

In his campaign for the May presidential election, Sarkozy promised to be the president of "purchasing power".

Although official statistics show purchasing power has improved, polls show French people are worried about rising living costs, notably higher petrol, lodging and food prices.

This has hurt consumer spending, the main driver of the French economy.