French 2010 budget to lay bare deficit woes

France will chalk up a record deficit in 2009 and will not be able to improve state accounts next year despite a recovering economy, the government will say when it unveils its 2010 budget next week.

The scale of the challenges faced by Europe's second-biggest economy was set out by Prime Minister Francois Fillon in an interview published on Sunday, in which he predicted an end to the recession but no quick fix for ballooning state spending.

Fillon told le Journal du Dimanche newspaper that the deficit would come in at 8.2 per cent of gross domestic product this year, higher than previously forecast and easily beating the previous record of 6.4 per cent set in 1993.

The French deficit came in at 3.4 per cent of GDP in 2008, since when the global recession has plunged accounts even further into the red thanks to a slump in tax returns and a government stimulus package primarily aimed at investment.

Fillon said he expected the economy to contract 2.25 per cent this year before growing 0.75 per cent in 2010. Despite this slight pick up, the overall deficit would not show any major improvement because of huge welfare costs, he said.

"With an insufficient economic recovery, the welfare budget deficit is going to continue to grow. Therefore next year we will not be able to do any better than to stabilise the global deficit," Fillon was quoted as saying.

Analysts said this showed France was making no headway in tackling its structural economic problems, with state spending representing around 54 per cent of GDP, against a eurozone average of some 46 per cent, but not generating much growth.

"If the public deficit was increasing, but at the same time there was a strong economic recovery, then it might be worth it. But that is not happening here," said Marc Touati, director general at Global Equities, a financial services brokerage.

"The French business model is not working. We have high taxes and high public spending, but we also have growing levels of social inequality and weak growth."

Debt and Unemployment Also Rising

Under European Union rules, governments are meant to keep their deficit to under 3 per cent of GDP. Many countries have failed to respect this in 2009 because of the economic crisis, but France's problems are likely to cause concern.

As well as deficit woes, France also faces a debt headache, with its debt-to-GDP ratio projected to jump to 77 per cent in 2009, 83 per cent in 2010 and 88 per cent 2012, against 68.1 per cent in 2008. The EU ceiling is set at 60 per cent.

French ministers say it is vital to carry on supporting the economy to prevent a swift return to recession and Fillon warned he did not expect to see an end to rising unemployment for several months, underlining the sickly state of the economy.

"It is going to continue to increase in the first half of 2010, even if the rate will slow," he said.

According to the latest data from the European Union statistics office, the French unemployment rate rose to 9.8 per cent in July from 9.6 per cent in June.

Fillon said stimulus measures introduced this year would be maintained in the 2010 budget, due to be unveiled on September 30, to support jobs and businesses.

Small firms that hired staff will carry on receiving tax breaks while a popular scheme to encourage people to buy more ecologically-friendly cars would only be gradually phased out.

As expected, the government will also introduce a carbon tax next year to encourage greater energy efficiency, Fillon said