Sarkozy government pledges to leave 2012 spending unchanged

French President Nicolas Sarkozy's government presented a 2012 budget that keeps spending unchanged from this year, with higher debt and pension charges continuing to weigh on its deficit.

The deficit in 2012 will be 81.8 billion euros ($111.3 billion), or 4.5 percent of economic output, down from 95.5 billion, or 5.7 percent, this year. The deficit was 7.1 percent in 2010. Spending in the government's general budget and payments to local governments will amount to 275.6 billion euros in 2012, unchanged from 2011.

“The 2012 budget is built to cut spending, it's a key, essential step on our way to cut debt,” Budget Minister Valerie Pecresse told reporters in Paris. “For the first time since the war, a government has managed to hold the line on spending.”

Sarkozy, like President Barack Obama, must balance his re- election bid against the need to fix his nation's finances. France, the second-biggest contributor to the euro region's bailout funds, now pays a premium of 73 basis points over Germany to borrow for 10 years, up from 27 basis points when the rescue system was set up in May 2010.

Both Germany and France are AAA-rated countries. France's financial institutions' holdings of debt in troubled euro-region countries and its slowing economic growth sparked speculation its top credit rating may be at risk.

“We are being scrutinized, we must keep our commitments,” Pecresse said.

Debt Servicing

The cost of servicing France's debt will rise to 48.8 billion euros in 2012 from 45.4 billion euros, and pension spending will increase to 37.9 billion euros from 36.0 billion euros, the budget shows. The debt will start to decline from 2013, Pecresse said.

“Debt will fall when the deficit drops below 3 percent of gross domestic product,” Pecresse said. “The turning point will be in 2013, that's when debt will start to decrease.”

At 1.6 trillion euros, France's outstanding debt will be about 85 percent of GDP by year-end, according to the International Monetary Fund. That compares with 120.6 percent for Italy and 98.3 percent for the U.S.

The budget calls for a 3 percent tax on all incomes over 500,000 euros that will last until the deficit falls below 3 percent of GDP. Some members of Sarkozy's party have called for the income threshold for the tax to be lowered to 250,000 euros.

Pecresse said she expects Parliament to debate the issue. The budget also raises taxes on sugared drinks, and a one-off tax on companies participating in the European Union's emissions-trading system to help fund the purchase of additional allowances for new plants.

Opposition Control

Outlines of the 2012 budget were announced last month when Prime Minister Francois Fillon unveiled 12 billion euros in budget-trimming measures to reassure markets the country was committed to shrinking its deficit.

The budget will be the first of the five that Sarkozy's government has presented since his 2007 election that will face a Senate controlled by the opposition. The Socialist party this week took control of the Senate, which can delay, although not block, legislation.

France will continue to replace only one out of every two retiring civil servants, Pecresse said, which will reduce the state's payrolls by 30,400 in 2012.

The budget is based on French growth of 1.75 percent in 2012 and a consumer inflation rate of 1.7 percent. It also presupposes a U.S. expansion of 2 percent, euro-area growth of 1.4 percent, an exchange rate of $1.43 to the euro and Brent oil at $110 a barrel.

For 2013 to 2015, the government is forecasting 2 percent growth a year.

--Editors: Vidya Root, Jeffrey Donovan

To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1bloomberg.net; Gregory Viscusi in Paris at gviscusibloomberg.net

To contact the editor responsible for this story: James Hertling at jhertlingbloomberg.net.