French PM warns of more cuts to contain 'spiralling' deficit

By Leigh Thomas PARIS (Reuters) - France will take urgent steps to rein in a spiralling deficit, Prime Minister Edouard Philippe said on Thursday, warning voters they would have to tighten their belts in support of the next generation and the country's standing in Europe. Heeding a call from the public audit office for action, Philippe said his government would come up with savings rather than tax hikes to plug the more than 8 billion euro shortfall. "As I speak, our debt rises every second. We can't do that to our children. They shouldn't be the ones paying for this," he said in a rare televised address by a serving prime minister. "Under the president's authority, the government will put an end to the continuous spiralling increases in our deficits," said the former conservative mayor appointed by Emmanuel Macron last month. Elected in May on pledges to reform the economy, the president faces a first major test to find the extra savings deemed necessary by the Cour des Comptes audit office, after the last government overspent in its final months. Unless cuts are made, the public sector deficit will reach 3.2 percent of economic output this year, exceeding the previous Socialist-led government's 2.8 percent target. "This situation requires a big effort to keep spending in control," Cour des Comptes head Didier Migaud told journalists, urging the new government to break with its predecessor's habit of under-budgeting expenditures. The auditor estimated savings of up to 5 billion euros (£4.38 billion) would be required if Macron's government is to respect its pledge to post a deficit of 3.0 percent or less this year, honouring an EU-agreed limit for the first time in a decade. CREDIBILITY France's fiscal credibility with its European partners and Germany in particular has long suffered from Paris' repeated failure to keep to the EU limit, which it has broken in 12 of the last 15 years. "All these tricks place France in a situation of major weakness vis-a-vis our European partners," Philippe said, blaming his predecessors for making what he called "blank cheques". Last year France posted the biggest deficit in the European Union after Spain, at 3.4 percent, which the public auditor said was the legacy of years of slower deficit reduction than other states and faster spending growth. Government ministers had made no secret they expected bad news. By ordering the audit and preparing public opinion about possible belt-tightening measures, Macron's government is keen not to repeat his predecessor's mistake, who became irredeemably unpopular by abruptly raising taxes at the start of his mandate in the face of a gaping deficit. "Emmanuel Macron has learnt the lessons from Francois Hollande's mistake in mid-2012 who did not communicate enough on the tough situation of public finances," former budget minister Christian Eckert said in a blog post. The auditor warned that 2018 would be tricky if the government were to trim a further 0.5 percentage points from the deficit as planned, especially as higher spending is expected on security, infrastructure and local authorities. To keep deficit reduction on track, spending growth would have to be kept to no more than the rate of inflation. It has run 0.9 percent annually on average between 2011 and 2016, the audit office said. Macron's campaign platform included plans for 60 billion euros in budget savings over his five-year term, but details are scarce and it also calls for 50 billion euros in investment, as well as tax cuts. The public auditor said the central state's budget was running 5.9 billion euros over budget with 2.3 billion of that going to the recapitalisation of nuclear group Areva. (Additional reporting by Michel Rose and Myriam Rivet; editing by John Stonestreet)