PARIS (Reuters) - France's economy could shrink this year and miss future government forecasts, the country's budget watchdog and the IMF warned on Tuesday, casting doubt on Paris's pledge to cut its deficit below 3 percent of output.
France will unveil a revised multi-annual budget plan on Wednesday to try to meet the 3 percent EU deficit ceiling in 2014. It acknowledged earlier this year that it will miss the target this year because growth has stalled.
The new plan is crucial to France's efforts to persuade its euro zone partners to agree to extend time to meet the target. Sceptics say, however, that France will struggle to meet even more modest growth targets because consumer spending is drying up and company investment staying weak.
The International Monetary Fund slashed its own 2013 forecast on Tuesday, predicting Europe's No. 2 economy will now shrink by 0.1 percent this year versus a projection of 0.3 percent growth it made three months ago. France could grow 0.9 percent next year, it said.
The government is basing its new fiscal plan, which it will put to parliament next week before submitting it to the European Commission, on growth forecasts of 0.1 percent this year, 1.2 percent next year and 2 percent on average in 2015-2017.
Its new independent budget watchdog, the High Council for Public Finances, warned of risks to growth in gross domestic product (GDP) posed both by the economic outlook in Europe and by weak domestic demand.
"The High Council ... considers that a slight contraction of GDP in 2013 and growth well below 1.2 percent in 2014 cannot be ruled out," it warned in a report, adding that growth could also be below forecast in 2015-2017.
Despite concern about the new targets, Finance Minister Pierre Moscovici said it would have been unwise to opt for more pessimistic estimates.
"Given the extent of the reforms under way, setting a more cautious growth target in 2014 would not be justified and would require an excessive adjustment to bring the deficit below 3 percent of GDP in 2014," he said in a statement.
The revised deficit targets to be put forward on Wednesday include a reduction of the deficit to 2.9 percent of economic output next year from an expected 3.7 percent this year.
Under European Union budget rules, euro zone countries can face fines if they fail to take action to meet deficit targets.
The European Commission has said, however, that it could be lenient if the economic outlook worsens and France cuts its structural deficit, which strips out the effects of the economic cycle.
France, which reaffirmed last week that it would stick to the structural deficit targets, had based its 2013 budget bill on forecasts of 0.8 percent growth this year and 2 percent next year, now seen as much too optimistic.
The Socialist government confirmed on Tuesday that its new target was to cut the deficit to 2.9 percent of output in 2014.
"The 3 percent (target), it's in 2014 that we'll have to reach it, that's what we will write in the stability plan ... 2.9 percent more precisely," government spokeswoman Najat Vallaud-Belkacem told BFM TV.
Government bond yields have so far been unharmed by the state's fiscal troubles and are at record lows, with Paris attracting yield-hungry investors looking for more safety than in the euro zone periphery.
Additional reporting by Catherine Bremer and Leigh Thomas; editing by Mark John/Jeremy Gaunt