September 11, 2013 / 11:24 AM / in 4 years

France downgrades growth forecast, delays deficit targets

PARIS (Reuters) - France revised its public deficit forecasts on Wednesday, acknowledging it would take advantage of an extra two years granted by the EU in order to put its finances back on track while preserving fragile growth.

The euro zone’s second-largest economy exited a shallow recession in the second quarter but still struggles with weak activity and high unemployment.

As a result its 2014 budget will be based on a growth forecast of 0.9 percent, the government said, lowered from a previous 1.2 percent forecast. It confirmed it expects feeble growth of 0.1 percent this year.

The move to revise growth and deficit forecasts is in line with recommendations by the International Monetary Fund and European Commission. They had warned that France’s projections were too optimistic and that it would need more time to put finances back on track without strangling the nascent recovery.

The Socialist government, under fire for relying largely on taxes to plug fiscal gaps, cut planned tax hikes for next year, saying spending cuts would minimize the impact on growth.

“We have decided on deficit targets that support growth,” Finance Minister Pierre Moscovici told a news conference.

The European Commission had told France in May it could take until 2015 to bring its deficit under 3 percent of GDP, but had angered Paris with recommendations on reforms it should implement in return, including that of its pension system.

The government, which is faced with weaker-than-expected tax revenues this year, is now targeting a deficit of 4.1 percent of national output in 2013, up from an earlier target of 3.7 percent. Next year’s target is 3.6 percent, up from an initially projected 2.9 percent.

The deficit stood at 4.8 percent of GDP in 2012.

But after repeated revisions of growth and deficit forecasts some analysts warned that even the new target to bring the deficit below 3 percent in 2015 could be difficult considering France’s decades-old struggles with cutting public spending.

“As far as taxes are concerned the French administration is very efficient, but in terms of cutting public spending they really need to prove they can do it. We have some doubts they will see this fully through,” said Societe Generale economist Michel Martinez, whose growth forecasts are lower than the government‘s.

In what Prime Minister Jean-Marc Ayrault described as the “battle for growth”, spending curbs of 15 billion euros will make up the bulk of the total 18 billion euros in deficit reduction in 2014, with the remainder from higher taxes and clamping down on tax evasion.

There will be no additional taxes for businesses next year, the government said, adding that it will review its corporate tax policy so that it weighs less on production tools.

The 2014 budget bill will be officially presented in full on September 25.

Additional reporting by Jean-Baptiste Vey and Yann Le Guernigou; Editing by Catherine Evans

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