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France: Can Hollande win back voters with tax cuts?


France's left wing government has unveiled its budget for next year, offering household and business tax cuts, despite a weak economic backdrop and a rocky political future for the country's President Francois Hollande.

The Finance Ministry outlined a budget focused on cutting public spending and tax cuts for families and businesses for the euro zone's second-largest economy after Germany, setting out 16 billion euros ($17.7 billion) of measures to reduce spending.

It said that total government spending, among the highest in developed countries, would fall next year to 55.1 percent of economic output from an estimated 55.8 percent this year.

The ministry said it would use some of the gains from reduced public spending to cut taxes for families and businesses by 2 billion and 9 billion euros, respectively, Dow Jones news agency said.

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The government predicted earlier this month that, based on a growth rate of 1.5 percent in 2016, the public deficit would fall to 3.3 percent next year (from 3.8 percent this year) – still above the European Union's official deficit threshold of 3 percent. French Finance minister Michel Sapin said the deficit should fall below 3 percent in 2017.

Public debt was seen reaching a lower than expected 96.5 percent of the country's economy next year, up slightly from 96.3 percent this year but it would then gradually decrease, the finance ministry said.

Challenges ahead

The budget comes at a time of uncertain economic and political prospects.

The tax and spending cuts could prove crucial for the government and its record on the economy. Next year will also be the last full fiscal year before a presidential election in which Hollande could lose, if his low approval rating (at 23 percent, according to a September Ifop poll) are anything to go by.

Earlier this month, ratings agency Moody's downgraded France's government bond ratings from Aa1 to Aa2 due to what it called the "continuing weakness in France's medium-term growth outlook, which Moody's expects will extend through the remainder of this decade."

In addition, it said the downgrade was made with "the challenges that low growth, coupled with institutional and political constraints, poses for the material reduction in the government's high debt burden over the remainder of this decade" in mind.

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France's latest gross domestic product (GDP) data for the second quarter of 2015 showed growth was flat, yet the 2016 budget is predicated on a growth rate of 1.5 percent next year. It foresees 1 percent growth in 2015.

Despite the forecast leap in growth, and skepticism shared privately among economists, France's public finance watchdog said on Wednesday that it saw the 2016 growth forecast as "achievable."

There may be optimism within France but analysts elsewhere remain cautious, stating that reforms designed to boost French growth – ranging from labor law modernization to more business-friendly policies -- would take time to have an effect.

"The starting point for the 2016 budget is favorable and the deficit will probably continue to fall next year, although fiscal sustainability is not secured yet," according to chief European economist at Morgan Stanley, Carmen Nuzzo.

"Market participants should focus on the spending details, which will test the government's resolve to implement structural reforms," she said in a note last week.

- CNBC's Stephane Pedrazzi contributed reporting to this story.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld