France targets deficit cut with tax-hiking Budget

President Francois Hollande's Socialist government unveiled sharp tax hikes on business and the rich on Friday in a 2013 Budget aimed at showing France has the fiscal rigour to remain at the core of the euro zone.

The package will recoup 30 billion euros for the public purse with a goal of narrowing the deficit to 3.0% of national output next year from 4.5% this year - France's toughest single belt-tightening in 30 years.

But with record unemployment and a barrage of data pointing to economic stagnation, there are fears the deficit target will slip as France falls short of the modest 0.8% economic growth rate on which it is banking for next year.

The budget will also disappoint pro-reform lobbyists by merely freezing France's high public spending rather than daring to attack ministerial budgets as Spain did this week in a bid to avoid the conditions of an international bailout.

"This is a fighting budget to get the country back on the rails," Prime Minister Jean-Marc Ayrault said, adding that the 0.8% growth target was "realistic and ambitious".

"It is a budget which aims to bring back confidence and to break this spiral of debt that gets bigger and bigger."

With public debt at a post-war record of 91% of the economy, the budget is vital to France's credibility not only among euro zone partners but also in markets which for now are allowing it to borrow at record-low yields under two%.

The government said the budget was the first in a series of steps to bring its deficit down to 0.3% of GDP by 2017 - missing an earlier target of a zero deficit by then.

Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax increases already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.

FEARS OF EXODUS

To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75% super-tax rate for earnings over one million euros and a new 45% band for revenues over 150,000 euros.

Together, those two measures will bring in around half a billion euros. Higher tax rates on dividends and other investments, plus cuts to existing tax breaks will bring in several billion more.

Business will be hit with measures including a cut in amount of loan interest which is tax-deductible and the cutting of an existing tax break on capital gains from certain share sales - moves worth around four billion and two billion euros each.

Four months after he defeated Nicolas Sarkozy, Hollande's approval ratings are in free-fall as many French feel he has been slow to get to grips with the economic slow-down and unemployment at a 10-year high and rising.

Data on Friday confirmed France posted zero growth in the second quarter, marking nine months of stagnation, as a pickup in business investment and government spending was offset by a worsening trade balance and sluggish consumer expenditure.

Despite a rise in wages, consumers - traditionally the motor of France's growth - increased their savings to 16.4% of income from 16.0% a year earlier. In another setback, other data showed consumer spending dropped 0.8% in August.

"Altogether the data paint the picture of a stagnating economy," said BNP economist Dominique Barbet.

BNP Paribas economist Helene Baudchon said the deficit was likely to come in above 3.0% due to the weak growth outlook. "As things stand, achieving a deficit of 3.3% would in itself be a remarkable outcome," she said.