August 20, 2010 / 5:45 PM / 9 years ago

France cuts growth outlook and says deficit top priority

PARIS (Reuters) - President Nicolas Sarkozy’s government cut its 2011 growth forecast to 2 percent on Friday, bringing it closer to that of private sector economists, and said reducing a large fiscal deficit was France’s top priority.

France's Prime Minister Francois Fillon (R) walks ahead of, from L-C, France's Economy Minister Christine Lagarde, François Baroin, France's junior minister of Budget, Public Accounts and State Reforms, and President Nicolas Sarkozy after emergency talks on the 2011 budget at the Fort de Bregancon in Bormes-les-Mimosas on August 20, 2010. REUTERS/Gerard Julien/Pool

In a statement issued after Sarkozy held emergency talks with senior ministers on the 2011 budget, the government said it would eliminate 10 billion euros in tax breaks and pledged to avoid unpopular increases in income, value-added and corporate taxes.

Sarkozy, whose popularity is near record lows ahead of an election in 2012, convened the talks with Prime Minister Francois Fillon and Economy Minister Christine Lagarde just days after Moody’s ratings agency warned that France — and several other top-rated nations — was inching closer to losing its AAA rating.

Sarkozy’s conservative government has told Brussels it will reduce its deficit from around 8 percent of GDP this year to 3 percent by 2013, implying some 100 billion euros in savings. It has yet to detail where much of those savings will come from.

“The president said that cutting the public deficit to 6 percent of GDP by 2011, whatever the level of economic growth, is the main objective of the country,” said the statement from the Elysee presidential palace.

“Reducing the deficit must be achieved by cutting public spending as a priority. Neither income tax, VAT or corporate tax will be increased.”

The government said France would meet or exceed its 1.4 percent target for growth this year, after the economy accelerated to a better than expected 0.6 percent rate of expansion in the second quarter.

However, economists expect expansion to cool off in the second half as stimulus measures expire. The forecast in the latest Reuters poll for this year and next is growth of just 1.3 percent.

CONTRAST WITH GERMANY

The reduction in the 2011 forecast from a previous 2.5 percent, came just a day after the Bundesbank raised its expectations for Germany’s expansion to 3 percent from 2 percent, underscoring the divergence of the euro zone’s top economies.

“The underlying pace of recovery is very different in Germany,” said Gilles Moec, an economist at Deutsche Bank. “We should continue to see outperformance by Germany in the second half of the year.”

Analysts had warned that France’s over-optimistic growth forecasts — it had been predicting 2.5 percent for 2011 and the following two years — was a major obstacle to it drafting a credible deficit-cutting plan.

Budget Minister Francois Baroin said later that the revision to the growth forecast meant France would have to find an additional 3 to 3.5 billion euros for its 2011 budget by the end of September.

Baroin said the funding target was attainable given the gradual recovery of the job market.

“As you know since the first quarter, almost 60,000 jobs have been created. That translates to about 2 billion euros of additional revenues,” Baroin told RTL radio.

Nick Matthews, senior European economist at RBS in London, who forecasts French growth at 1.5 percent in 2011, said: “There may be some people who think 2 percent is still too high, given that we are likely to see a slowdown in growth in the second half of the year, not only France but in the broader euro zone.”

“It is achievable but many people will still think it’s too high,” he said.

On Tuesday, Moody’s said France and fellow AAA sovereigns the United States, Britain and Germany were still “well-positioned,” but cautioned that they faced challenges to improve anaemic growth rates and make credible fiscal adjustments.

Additional reporting by John Irish, Noah Barkin, Bate Felix and Yann Le Guernigou in Paris, Pierre Thebault in Bregancon; editing by Patrick Graham and Hugh Lawson

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