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France says 'unprecedented' cuts in next budget

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(Globalpost/GlobalPost)

France on Wednesday announced "unprecedented" cuts in its next budget, admitting it will not meet its EU-mandated deficit target this year and that the economy will do worse than previously expected in 2014.

Despite emerging from a shallow recession in the second quarter, France is struggling to get its tepid economy back on track amid record-high unemployment, limited investment and low consumer spending.

Prime Minister Jean-Marc Ayrault said there would be "unprecedented" cuts of 15 billion euros ($19.8 billion) in the 2014 budget -- one billion more than previously indicated by the Socialist government.

"It's a budget to kickstart job creation, that's the main battle," Ayrault said.

Another 3 billion euros will be raised through increased taxes, Budget Minister Bernard Cazeneuve said, as government officials unveiled the broad outlines of next year's public finances.

The Socialists had previously floated the idea of 6 billion euros in new taxes, but Finance Minister Pierre Moscovici said there would be no increases in employer payroll or household tax contributions.

Government spokeswoman Najat Vallaud-Belkacem said the focus was on spending cuts over tax increases in order to "ensure competitiveness and allow domestic demand to take off again."

Economists say France's high labour costs are making it less competitive in the global economy and consumer spending has fallen in recent years amid the wider eurozone economic crisis.

--- Lack of meaningful growth ---

France's economy did enjoy higher-than-expected growth in the second quarter -- echoing a wider recovery in the eurozone -- but there have been no indications of a sustained return to meaningful growth.

Moscovici said the government was lowering its growth forecast for 2014 to 0.9 percent, from a previous prediction of 1.2 percent. It is maintaining its 0.1 percent growth forecast for this year, he said.

Moscovici said France's 2013 public deficit will come in at 4.1 percent of GDP, higher than the 3.9 percent agreed with the European Union, but vowed Paris would meet its 2015 EU-mandated deadline to bring the deficit below 3 percent.

The 2014 deficit will come in at 3.6 percent, he said.

In May, the European Commission gave France an additional two years to bring its public deficit back under the EU ceiling.

It said France should cut the public deficit from 4.8 percent of GDP in 2012 to 3.9 percent in 2013, then 3.6 percent in 2014 and 2.8 percent in 2015.

"The pace of deficit reduction is not going as quickly as we'd like," Cazeneuve said, adding this was "essentially" the result of the "European and international context".

The full budget is to be presented to the cabinet on September 25 before being put to a parliamentary vote.

With 80 percent of savings next year coming from cuts, Moscovici described the budget as "courageous and reformist".

"This is an aggressive and fair budget that supports growth today and prepares for the growth of tomorrow," Moscovici said.

The budget includes increases in the value-added tax and cuts in several types of tax breaks, including for health insurance contributions and assistance with paying for school and university fees.

The main opposition right-wing UMP said the cuts in tax breaks were in effect tax hikes and would have a significant impact on household spending power.

"If household spending power falls again in 2014 because of tax payments then consumer spending, one of the key drivers of the economy, will feel it," said Gilles Carrez, the UMP head of the finance committee at the lower house National Assembly.

"We must be much more courageous on spending," Carrez said. "The big unknown about this budget is where exactly the savings will come from."

President Francois Hollande's government has struggled to turn the economy around since he took over from conservative Nicolas Sarkozy last year, and Hollande has become deeply unpopular.

The government has vowed to reverse this year a steady rise in unemployment -- which topped 3 million for the first time in the second quarter -- but economists say that's unlikely.

Adding to Hollande's woes, the INSEE national statistics agency said Wednesday that 34,600 commercial jobs were lost in the second quarter, a huge increase from the 4,700 such jobs lost in the first quarter.

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http://www.globalpost.com/dispatch/news/afp/130911/france-says-unprecedented-cuts-next-budget-0