Sarkozy moves to protect credit rating in massive budget deficit cuts

FRENCH President Nicolas Sarkozy’s government has outlined the country’s biggest budget deficit cut in two decades to calm investor concerns and protect its top credit rating.

The government shortfall will drop to €92 billion, or 6% of gross domestic product, next year from €152bn, or 7.7%, the Budget Ministry said yesterday.

The reduction stems mainly from the end of recession-fighting stimulus and one-time investments. Tax revenue and spending will remain virtually unchanged.

“The investors who finance our debt are paying close attention to our deficit plans,” Finance Minister Christine Lagarde told journalists in Paris. “We will do what it takes” to achieve the fiscal target, she said.

Sarkozy’s budget may still leave his country trailing its euro-area peers in repairing national finances after the debt crisis. France’s deficit may exceed that of Germany, Italy, Belgium and the Netherlands just as Sarkozy is gearing up for an election in early 2012.

French government bond yields may increase relative to benchmark German bunds as the country isn’t willing to enact austerity measures, said Nomura International.

Among the 16 euro-area countries, Ireland and Greece will have bigger deficits than France next year, while Portugal and Spain will be at about the same 6% level, Barclays Capital estimates. Germany will have a shortfall of 3.5% of GDP, while Italy, the Netherlands and Belgium will have deficits of 4.7%, 4.1% and 4%, Barclays said.

Reaching the deficit target depends on growth of 2% next year, up from an expansion of about 1.5 this year. The budget assumes an inflation rate of 1.5%.

“We’re really quite confident in the growth forecast, there is no soul-searching about it,” Lagarde said.

The biggest savings will come from a drop in one-off expenses to €2.9bn from €70.5bn.