France treads fine line on EU deficit-cutting targets

By Nicholas Vinocur and Jean-Baptiste Vey

PARIS (Reuters) - France outlined a slower roadmap on Wednesday to reduce its chronic deficit to the European Union's treaty limit next year, based on growth assumptions described by an independent watchdog as risky.

Europe's second-biggest economy, with the highest public spending quota in the EU, is a serial laggard where recovery and public finances are concerned.

It has already been granted a two-year extension until 2015 on the original deadline to bring its public deficit below the ceiling of 3 percent of gross domestic product (GDP).

Its partners fear it may miss the deadline again next year, but an unpopular Socialist government is struggling to sell painful savings to the electorate and to rebellious rank and file lawmakers, even though they are milder than in many other European countries.

In documents delivered to the parliamentary finance committee, the government raised its official forecasts for the deficit for this year and next by 0.2 points to 3.8 percent and 3.0 percent of GDP respectively.

That leaves no margin for error should growth fail to meet government projections - as most private economists expect.

"We know this is a demanding strategy, which requires courage from all, but it's a strategy which is up to the scale of the challenge," Finance Minister Michel Sapin told lawmakers.

The plan also abandoned President Francois Hollande's commitment to balancing the budget by the end of his term in 2017, envisaging a deficit 1.3 percent of GDP in that year.

Appointed in late March after the Socialists were drubbed in local elections, Prime Minister Manuel Valls promised in his first policy speech to give priority to kick-starting growth, fuelling concern that Paris might demand more time to reach the target.

But after stern words from Brussels and Berlin, the government said it would stick to its commitments, unveiling a 50 billion euro (41 billion pounds) savings package that will freeze pensions and welfare benefits for a year, keep most civil service pay frozen until 2017 and clamp down on public spending.

After Wednesday's presentation, Valls will send the package to the European Commission, which polices member states' public finances.

The EU executive is likely to decide on June 2, after next month's European Parliament elections, whether to extend an excessive deficit disciplinary procedure against France which began in 2009. An EU source said sanctions could not be ruled out but the final decision would be political.

The government raised its growth forecasts to 1.0 percent in 2014, 1.7 percent in 2015 and 2.25 in 2016, versus 0.9 percent, 1.7 percent and 2.0 percent previously.

"WEAKNESSES" AND "RISKS"

However, the High Council of Public Finances, a watchdog made up of public auditors and independent economists, called into question the forecasts beyond this year.

It said the 2015 prediction was "not out of reach," but added "the macroeconomic scenario presented by the government contains several weaknesses and is subject to various risks," relying on a rebound in consumer confidence and revenues from recently announced supply-side measures.

It called the 2016 and 2017 forecasts "optimistic" - a euphemism for unrealistic.

The 2014 and 2015 forecasts are well above those of a Reuters poll of economists last week, which put growth at 0.8 percent this year and 1.2 percent next year, with France missing the deficit reduction target.

Economic data released on Wednesday did little to support government optimism. The private sector expanded at a much slower rate in April, surveys showed, underlining the fragility of the recovery.

French governments of left and right have a track record of basing budget plans on rosy growth and revenue assumptions that lead to a higher deficit when growth falls short.

A new EU budget review procedure gives the Commission more power to challenge figures its own economists deem unrealistic and send a national budget plan back for redrafting.

Diplomats said in advance of the plan that if it aimed for a 3 percent deficit next year, a lame-duck Commission in its last months in office would probably not want to clash with Paris.

In 2013, France missed its target of 4.1 percent and its deficit ended the year at 4.3 percent of GDP.

Some officials in Paris hoped that Italy's new socialist prime minister, Matteo Renzi, would be an ally in bending the EU targets. But Renzi, whose country is already under the 3 percent deficit limit, has decided to play by the rules.

(Reporting by Nicholas Vinocur and Alexandria Sage; Writing by Andrew Callus; Editing by Paul Taylor and Eric Walsh)