French national auditors warned the French government on Thursday that it was likely to miss revised budget targets this year, putting it on course to break a pledge it made to the European Commission to reduce its deficit to 3 percent of gross domestic product (GDP) by 2015.
In the wake of the financial crisis, euro zone countries are under pressure to show they can keep their finances in check, with Germany leading the charge for fiscal discipline.
At the height of crisis, skyrocketing debt levels prompted investors to push borrowing costs for countries such as Greece and Portugal up to unsustainable levels, forcing them to seek a bailout from their peers.
The French government, which takes the view that austerity alone will simply put further pressure on the economy, announced earlier this year it would miss the EU-mandated 3 percent deficit target this year. It has instead forecast a deficit of 3.7 percent of GDP. The Commission in May gave the country two more years to hit the 3 percent target.
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According to the report from the Cour de Comptes, France's national "Court of Auditors, " France needed to make a "major effort to focus on spending" if it was to meet the 3 percent budget deficit target in 2015.
But with the economy likely to shrink this year, the auditors said, there was little chance that France could meet its 3.7 percent budget deficit target in 2013.
"The deficit declined in 2012, but its level was higher than the government's target," the auditors warned, adding that "negative growth is likely in 2013, which will result in lower than expected revenues".
It cited additional risks including the uncertain evolution of corporate income tax and VAT (sales tax), both of which are subject to a potential increase. "Overall, the risks identified to date could lead the government to bring the public deficit in 2013 to around 4 percent," the auditors added. The budget deficit was 4.8 percent in 2012.
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As such, there was no room for "any relaxation of the structural effort" to reduce the deficit, the auditors added. They emphasised that the government must proceed with structural reforms and balancing budgets for the pension and healthcare systems.
"Despite significant structural effort, the position of France compared to its neighbors in Europe has not improved," the auditors said, "with France's deficits still higher than the average for the euro area and the European Union."
The report follows economic data on Wednesday which confirmed that the French economy was in recession. The second estimate of France's first-quarter GDP confirmed a contraction of 0.2 percent quarter on quarter, the fourth decline in the past five quarters.
"With exports chronically weak, the French economy slipped into recession last year as private consumption also began to contract amid rising unemployment and low consumer morale," economists Tobias S. Blattner and Emily Nicol at Daiwa Capital Markets, said in a note following the data.
"And although business sentiment yesterday was reported to have improved for a third consecutive month in June, we maintain our view that the French economy is likely to contract by 0.2 percent this year and to return to growth of just 0.6 percent next year."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt
