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France Eyes More Belt-Tighting as Election Looms

With France's economic growth outlook fast deteriorating, President Nicolas Sarkozy increasingly has little choice but to launch a new round of belt-tightening six months from a presidential election.

French President Nicholas Sarkozy
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French President Nicholas Sarkozy

Sarkozy's conservative government had hoped that an 11 billion euro savings package for 2012, unveiled late in August, would be enough to keep France's deficit targets in reach next year and protect the country's prized AAA credit rating.

But the finance and budget ministers have both admitted that poorer-than-expected growth and increased scrutiny from ratings agencies mean more budget measures are possible.

Economists and some lawmakers say further savings would have to be worth at least 5 billion euros ($6.9 billion).

That leaves Sarkozy — already unpopular due to three years of economic gloom — to work out the best timing to break the bad news to taxpayers and decide which groups should bear the bigger burden as the April 2012 presidential election looms.

Budget Minister Valerie Pecresse said on Tuesday the government would not shy away from asking the French to shoulder more budget cuts if necessary, with a revision to growth targets likely in the near future.

"Time is working against us. We must not lose any time," Jean-Pierre Raffarin, a senator and former prime minister, told Les Echos business daily.

"We've got to make an effort like our (euro zone) partners.

These new efforts have got to be big and lasting." The centre-right government is likely to steer clear of painful austerity cuts or broad tax hikes like those that euro zone neighbours Italy and Spain have embarked on to reassure investors and ratings agencies about their public finances.

Instead, likely targets are the myriad tax exemptions that mean many French pay little income tax and cost the state billions of euros a year.

Whatever course the government takes, Baroin promised that public sector salaries would not be hit.

Ratings agency Moody's raised the pressure on the government last week when said it could put France's top-notch rating on negative outlook in the next three months if the costs for helping to bail out banks and other euro zone members overstretched its budget.

The government has repeatedly stated that it will take whatever measures are necessary so it can reduce the public deficit from an estimated 5.7 percent of gross domestic product this year down to an EU limit of 3 percent in 2013.

With economists forecasting on average growth of 1 percent next year, the government has acknowledged its forecast for 1.75 percent is too rosy.

Baroin said on Tuesday a downward revision was just a question of timing.

"If we overreact, we create a phenomenon of anxiety; if we underreact we lose time. So we will try to get the timing right," he told Canal+ TV.

How To Share The Pain

Lawmakers in the National Assembly, the lower house of parliament, approved the revenue side of the 2012 budget bill on Tuesday, although some opposition Socialist Party deputies said that it was already out of date.

"We are voting on numbers that we know are wrong," Socialist deputy Pierre Moscovici told journalists.

Deputies are due to begin debating the spending side of the budget next week.

Gilles Carrez, a senior UMP lawmaker and budget expert, said that each half percentage point of growth the economy loses equates to 5 billion euros in lost tax receipts, which have to be offset with further savings.

Carrez recommended cutting spending to drum up extra savings, although the government is likely to lean towards closing the hundreds of loopholes that riddle the French tax code as it did in its first savings package.

"If you don't want to hurt growth too much, then receipts will have to come from companies and the rich," said BNP Paribas economist Dominique Barbet.

The first package focused on closing tax breaks on the sale of second homes, tightening rules on corporate tax credits and an exemptions for a special tax on some private health insurance contracts.

Extra revenues were raised with a special tax on the rich and higher levies on tobacco, fizzy drinks and strong alcohol.

A recent finance ministry report concluded that the French tax code contained tens of billions of euros of tax breaks that served little economic purpose but bore huge costs.

For example, a tax reduction for services provided at one's home, such as house-cleaning or small repairs, was estimated to cost the state 6 billion euros a year.

However, cutting such tax breaks risks angering various constituents just as the battle for the presidential election hots up.

During negotiations over the 2012 budget bill Socialists in the National Assembly proposed scrapping 12 billion euros in tax breaks next year, but failed to get sufficient backing from other parties.