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France unveils slashed budget for 2012

By Sarah Dilorenzo

Associated Press

Published: Wednesday, Sept. 28 2011 9:59 a.m. MDT

PARIS — France proudly presented next year's budget on Wednesday as the first to cut spending since World War II, as it tries to convince nervous investors that it will get its debts under control.

But economists balked at the claim and said the cuts in the 2012 budget are not substantial enough to meet deficit targets laid out by the government — or to reduce the country's debt load. France hasn't balanced its budget in three decades and for years flouted EU rules that require members to keep their deficits under 3 percent of GDP.

Paris was not alone in ignoring the spending rules, and the result has nearly brought the eurozone to its knees: Ireland, Portugal and Greece have all needed bailouts to pay their bills after investors refused to lend to them, and Italy and Spain have seen their borrowing costs skyrocket.

France's own bond yields — the interest rate investors demand to lend a country money — rose this summer amid fears its debts were too high.

In response, the government unveiled a series of measures — mostly new taxes — that were reiterated in Wednesday's budget. Among other measures, it plans to increase taxes on the wealthy, levy a tax on sugary drinks and close loopholes.

It also promised to cut around 30,400 public jobs next year by not replacing one in two posts vacated by people retiring.

Budget Minister Valerie Pecresse told her colleagues Wednesday that the measures would make next year's deficit nearly 15 billion euros ($20.4 billion) smaller than this year's.

"Public debt reduction is a priority. It happens by first reducing the public deficit," a statement from the Budget Ministry said.

Spending was expected to be 80.8 billion euros, it said.

"It's a historic moment: For the first time since 1945, public expenditures year-on-year will go down," Pecresse told Wednesday's Cabinet meeting.

But economists said while that claim may be true on paper, next year's spending was almost certainly going to outstrip this year's.

"Every budget predicts a stabilization of spending ... and we see after the fact that these goals are never met," said Nicolas Bouzou, an economist with consulting firm Asteres.

He said that to really reduce the budget would take a rethinking of the role of the state, especially in terms of health care and retirement benefits.

Frederic Bonnevay, an economics expert associated with the Institut Montaigne think tank, called the budget a "guerrilla strategy rather than full battle plan" to tackle the problem of public indebtedness.

Next year, President Nicolas Sarkozy faces re-election, making the budget debate a particularly thorny one — and Wednesday's presentation focused much more on tax increases than the cuts. In a country where citizens expect a lot from their government, new taxes are typically easier to swallow.

But Sarkozy has staked his reputation on meeting deficit reduction targets, promising to bring it from 7.1 percent of GDP last year to 4.5 percent next year and 3 percent — the EU limit — in 2013. Further reductions were laid out, all the way down to 1 percent in 2015.

The ministry said those goals were built around an expectation of 1.75 percent growth in GDP — an estimate it had to slash earlier this year.

The global slowdown has made it increasingly difficult for countries to balance their budgets as weak growth means less money pouring in.

But the government said that the reduced level of growth was attainable — and even indicated it represented an abundance of caution.

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