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Fears France's budget will hit its economy

Mike Hewitt | Getty Images News | Getty Images

France presented its budget for 2014 on Wednesday introducing far-reaching spending cuts and shifting the tax burden from French businesses to households in an attempt to rein in its budget deficit and get its economy moving.

Released on Wednesday afternoon, the 2014 budget includes a 15 billion euro ($20.2 billion) cut in government spending next year and a 3 billion euro rise in taxes, with many of those increases hitting households and consumers.

While households will face a rise in sales tax and social insurance contributions due to national pension reform from January 2014, businesses will benefit from a 10 billion euro ($13 billion) tax credit,as the government tries to reduce the cost of labor in France and make French businesses more competitive.

(Read more: French budget 2014: business to win?)

France is the 28-country European Union's second-largest economy, after Germany, but it is struggling: unemployment is stuck at around 11 percent and its government deficit is at around 4 percent of gross domestic product – higher than the EU's ceiling of 3 percent.

Responding to the 2014 budget, analysts warned it could damage consumer confidence and threaten the economy's chances of recovery.

While it was a "very good thing" that the government was trying to redress the balance between spending and taxation, one economist noted, the consumer will pay the price for spending cuts: "The government is probably aware that we've reached a threshold in terms of tax levels and now spending should be the focus." Maxime Alimi, euro area economist at AXA Investment Managers, told CNBC on Wednesday.

"The government is aware that companies have also reached a threshold and they want to show that they're pragmatists and aware of all the sectors in the economy so I think cutting taxes for companies will help profitability first and potentially, business investment," he added.

The latest budget by France's socialist government, led by President Francois Hollande, anticipates no additional taxes for businesses, reversing earlier proposals for heavier business and high earner taxes that were unsurprisingly greeted with anger by the business world.

The figures bear testament to a loss of confidence too. On Wednesday France's statistics body, INSEE, reported that French business sentiment dropped in September from August, underperforming expectations.

(Read more: France is the biggest concern in Europe: Fed's Fisher)

Despite moves to appease French business, however, the household-hostile budget risks alienating voters further when Hollande's approval ratings are already at an all-time low. According to a monthly poll released this week, less than a quarter of voters are satisfied with his leadership.

Speaking to CNBC from Paris, Alimi said higher consumption taxes would "definitely" hurt consumer spending and the economy would likely remain in a period of stagnation as a result.

"We don't really think there will be a sustainable return in France this year and next. The main driver of growth in France is usually the consumer and no we think there are a number of headwinds for consumers- the VAT(sales tax) hike is one but also there is very high unemployment and low wage growth."

Philippe Waechter, head of Economic Research at Natixis Asset Management, agreed that households would come under increased fiscal pressure from the sales tax hikes.

"If you look at what is happening to companies and households, it's a different story. For households, and that's what's important, fiscal pressure will increase in 2014. It is the weakness of the budget because it will have an impact on household expenditure."

The proposed 2014 spending cuts come at a time when Francehas little choice over reducing its expenditure, however.

(Read more: France's Moscovici backs spending cuts, not tax hikes)

It faces pressure from the European Commission to bring its deficit under 3 percent of GDP (gross domestic product), the deficit ceiling demanded by the commission but French Finance Minister Pierre Moscovici has already said that France will miss its previous deficit targets for 2013 and 2014, raising them to 4.1 percent and 3.6 percent respectively. He is expected to visit Brussels on Thursday to show how the 2014 budget will help France on its way to achieving its deficit goals.

A member of France's finance commission and Hollande's socialist party, economist Karine Berger, defended the cuts, which will affect welfare payments, saying they were integral to the country's economic recovery.

"It's a left-wing budget [because] it tries to steer growth. We're just at the start of an economic recovery in France but next year is a big year for the recovery. The main point is that we want to sustain growth and recovery," she told CNBC in Paris on Wednesday.

"We have two big issues that we have to solve, the first is the public debt, our main goal is to decrease the debt and deficit as soon as possible and the second big issue is to sustain growth and we want to foster competitiveness that's why we want to give a little more money to companies for them to invest and create jobs."

Not everyone was convinced the budget would help France to achieve its deficit and growth goals, however. Natixis' Waechter said France's hopes of meeting its deficit targets would depend on the growth rate, forecast by the government to be 0.9 percent in 2013 and AXA's Alimi said he wasn't convinced France could meet that prediction.

"Probably France will stay in a [period] of stagnation," AXA's economist said. "We don't believe in the growth targets. The deficit targets are manageable but still it is a miss compared to what the government had committed to Brussels earlier this year."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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