France unveils plan to reach 2014 deficit target

France presented Wednesday a plan to get its public deficit back under the EU limit by 2014, having decided to let debt grow further as it tries to jumpstart a sputtering economy. The plan to bring the deficit below 3.0 percent of gross domestic product (GDP) is based on a broad effort that includes higher taxes and savings within the social security system. The "stability programme" was released by the finance ministry and based on what the government termed a "realistic" economic growth forecast of 0.1 percent this year and 1.2 percent in 2014, which it maintained would allow the public deficit to be cut to 2.9 percent of output next year. "What I want is fiscal sobriety -- essential for debt reduction in the medium term but also for growth without which there won't be deficit reduction," President Francois Hollande said. The growth forecasts have been questioned however both by the International Monetary Fund and a new independent French high council for public finances, with the IMF forecasting on Tuesday that the French economy would contract by 0.1 percent this year before expanding by 0.3 percent in 2014. And on Wednesday the French Economic Observatory at Paris' Sciences Po university gave an even bleaker outlook, expecting it to shrink by 0.2 percent this year. For 2014, however, it expects it to rebound by 0.6 percent. France was initially to have cut the deficit to 3.0 percent of GDP already this year, but has asked for more time owing to weak growth which has pushed the estimated 2013 public deficit figure up to 3.7 percent, compared with 4.8 percent in 2012. Under EU rules, eurozone members are expected to run public deficits of no more than 3.0 percent of GDP, and are supposed to work towards a balance, or even a surplus in times of economic growth. Without an EU extension, France could trigger procedures that might result in sanctions. The government is now pledging to bring the public deficit down to 2.9 percent next year, with Hollande having ruled out making more sharp spending cuts to reach the target this year. Under the programme, public debt is expected to reach a record peak of 94.3 percent of GDP in 2014 before beginning to decline a year later than initially planned. The European Commission, which will vet the plan once French lawmakers have approved it, said it would take a close look at France's new commitments, while German Chancellor Angela Merkel said: "We wish France success because France is key to the eurozone as a whole." Although the government had vowed to keep social charges at stable levels in 2014, the overall tax burden is forecast to increase to 46.3 percent of GDP this year, while public spending is expected to edge up to 56.9 percent. "An important effort will be necessary again" in 2014, the finance ministry acknowledged. About 70 percent of the 2014 deficit reduction effort is based on savings from reduced government spending, with the rest to come from higher revenues, including taxes and raised charges on pension programmes. A total of five billion euros ($6.5 billion) will be saved within the social security system, of which one billion euros will come from family benefits, one billion euros from pensions and three billion euros from health insurance benefits. Prime Minister Jean-Marc Ayrault said only the richest 15 percent of families will have their child benefits reduced as means-testing is introduced -- a controversial first for France. Finance Minister Pierre Moscovici insisted that "we haven't given up on anything" in its long-term fiscal goals. "The government's target is still to return to structural balance in 2017, to achieve the strongest growth possible and to reverse the unemployment curve at the end of 2013," he said. The government has pledged that unemployment, which hit 10.6 percent in the final quarter of 2012, will start declining by the end of this year. However, the IMF said Tuesday it expects France's unemployment rate to rise to 11.2 percent this year and to 11.6 percent in 2014. The programme will be debated in parliament on April 23-24 and be sent to the European Commission at the end of the month.