Over-taxed France should review deficit target, says IMF

France should review its 3pc deficit target with Brussels, the International Monetary Fund has said, as it warned that the country's already high tax burden risked dampening economic activity further.

In a report last week , the IMF said that weaker-than-expected growth meant that France would miss its 2013 target for a deficit of 3pc of gross domestic product (GDP). It predicts a shortfall of 3.5pc.

IMF directors said on Wednesday that it would be unwise for the French government, which has already passed huge budget cuts, to implement further fiscal measures in order to hit the target.

"There isn’t much of a case for accelerating measures further in response to a weaker economic environment," said Edward Gardner, the IMF's Mission chief for France in a conference call.

"Whether it's 3 or 3.5pc next year matters less to the extent that France can give reasonable credible assurances about the direction of policies," he added.

"Our recommendation is that France discuss the fact in a broader European context the appropriate stance for 2013."

The IMF also warned that France's high tax burden left the country with little room for manoeuvre.

"We think that France is hitting a limit where there is very little scope for raising taxes further without dampening economic activity," said Mr Gardner.

It urged the government to focus on spending cuts rather than tax hikes to get the economy back on track.

Last week, France passed a contentious budget that included a raft of new taxes, including a 75pc rate on earnings over €1m. In its report, the IMF noted that "with rates of taxation already among the highest in Europe, the ratcheting up of the tax burden in 2012 13 places France at an additional competitive disadvantage relative to its peers."

The Centre for Economics and Business Research (CEBR) has also warned that President Francois Hollande’s 75pc tax policy and the eurozone crisis meant that France’s presence on the world stage would diminish over the next decade.

The CEBR predicts that the size of France's economy will fall behind the likes of Britain , Russia and India by 2022.

The IMF urged France to implement widespread labour market reforms, particularly within the services sector, which powers more than 75pc of the country's economy.

"French labour costs [in the services sector] are much higher than in other countries, and high labour costs also mean narrower profit margins, which in turn means less capacity to invest and innovate," said Mr Gardner.

The IMF said last week that there was a “high” risk of further credit downgrades in 2013 if France's predicted growth of 1.7pc in 2013 did not materialise.

“France’s sovereign rating faces the risk of further reductions because of its relatively high public debt stock and budget deficit relative to other AAA-rated European countries,” it said.

"While the authorities are committed to meeting the fiscal targets of France’s Stability Program, additional efforts may be required in 2013, if growth is lower than the current official forecast of 1.7 pc.

Only French rating agency Fitch still rates the country at AAA.

Olli Rehn, the EU's Economic and Monetary Affairs Commissioner has said that France did not need additional savings measures and opened the door to a "softer adjustment".