November 6, 2011 / 11:12 PM / 8 years ago

France to gamble on new budget cuts as growth slows

PARIS (Reuters) - France will announce up to 8 billion euros in cuts and tax hikes on Monday, imposing more pain on voters to shore up its credit rating and hold down its deficit in a make-or-break gamble for President Nicolas Sarkozy six months before an election.

Sarkozy’s center-right government says extra savings are urgently needed to keep France’s finances from going off the rails, since it cut its growth forecast for next year to 1 percent from 1.75 percent last week.

The cuts, which Prime Minister Francois Fillon is expected to announce at 6:00 a.m. EST on Monday, come on top of 12 billion euros ($16.6 billion) in savings the government announced just three months ago.

Like other European countries struggling with public finances, France has seen demonstrations and strikes from a public angry at the imposition of cutbacks during hard times.

Ratings agencies have been hinting they could cut France’s prized top credit rating because of its slowing growth and its potential liability for the cost of bailouts in the European debt crisis.

Without ever mentioning the word “austerity,” ministers from Sarkozy’s center-right government spent the weekend defending the need for fiscal vigilance amid fears of mounting debts in Western states.

“The 2012 budget will be one of the most rigorous budgets that France has seen since 1945,” said Fillon on Saturday, adding that France’s “hour of truth has arrived.”

Ministers have given no concrete details on where the cuts would come from, but said they would be “equitable.”

Finance Minister Francois Baroin told RTL radio on Sunday the measures will be balanced evenly between spending cuts and tax rises.

On Sunday, Les Echos newspaper reported that the transition to France’s higher retirement age of 62 would now take place in 2016 or 2017, rather than 2018.

Securing a rise in the retirement age to 62 from 60 was a key political victory last year — but a highly unpopular move — for Sarkozy, who said it was necessary to keep France’s ballooning pension deficit in check.

Speeding it up would mean saving billions in coming years by delaying payments to retirees.

The newspaper Journal du Dimanche reported the government could also raise France’s value added tax (VAT) rate in certain sectors from 5.5 percent to 7.0 percent, reversing an earlier policy to lower it.

The government might also slap a corporate tax on businesses with annual revenues over 500 million euros, the paper said.

Baroin denied speculation that French workers would be asked for an additional “day of solidarity” in which salaried workers work for free one day, their pay going to the state.

France is trying to reduce its budget gap from 5.7 percent of GDP this year to 4.5 percent next year. It hopes to reach an EU-mandated limit of 3 percent of GDP by 2013.

Preserving France’s coveted AAA credit rating through deficit reduction plans has been a key goal of Sarkozy, who in recent months has cast himself as a responsible steward amid the turmoil of the seemingly unending euro zone crisis.

The cuts come at a politically sensitive moment for a leader whose popularity ratings are low six months from a presidential election in which he is widely expected to seek a second term.

His expected Socialist presidential challenger, Francois Hollande, said on Saturday that raising the VAT rate so soon after lowering it would be “the proof of inconstancy, political incoherence”.

Editing by Peter Graff

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