Sarkozy Aims to Tame Deficit with French Budget

French President Nicolas Sarkozy unveiled his first budget on Wednesday aimed at pulling off a double whammy: encouraging growth with fiscal stimuli, while containing the burgeoning budget gap.

The 2008 budget, which will be submitted to parliament for approval in the coming weeks, forecasts the deficit will fall to 2.3% of gross domestic product in 2008 from 2.4% this year.

Expectations for growth are unchanged. The government predicts expansion between 2% and 2.5% for 2007 and 2008, admitting that the growth clip in 2007 will be at the bottom end of the forecast.

Sarkozy hopes to encourage growth through a package of tax cuts and spending increases such as financial incentives for employers to allow overtime hours, tax cuts for home owners and a measure reducing the tax burden on high-income taxpayers.

The law will cost 1.6 billion euros ($2.26 billion) in 2007 and 8.9 billion euros ($12.55 billion) next year, the government said.

To finance these measures, the government is hoping that higher economic growth will boost overall tax receipts. It also promises to keep public spending in line with inflation.

Helping to control spending, the 2008 budget plans to reduce its wage bill by cutting 22,900 civil servants jobs through attrition. Overall one in three retiring state workers won't be replaced when they retire.

While its hopes for the economy in 2007 have been dampened, the government said things will get better. It is aiming to equal or exceed a 2.5% clip after 2008 as reforms bear fruit and internal demand strengthens.

The French government's forecast is based on a strengthening of economic growth in the U.S. to 2.2% in 2008, after 1.8% this year. In the euro zone, economic growth is seen falling to 2.3% from 2.6%.