French cabinet agrees budge freeze to meet EMU criteria

FRANCE said yesterday it would freeze 1997 budget spending at this year's level, cut taxes and still achieve the European monetary union target of limiting public deficits to 3 per cent of gross domestic product.

"The target I set for myself for state spending in 1997 has been reached. We will not spend more next year than this year," Prime Minister, Mr Alain Juppe said after a cabinet meeting.

"I think everybody doubted it, but we made it," Mr Juppe told reporters.

Central government spending would be held at 1,552 billion French francs (£190.9 billion) in 1997, a fall of about 2 per cent in real terms.

The figure was agreed after intense wrangling between Mr Juppe, who staked his credibility on holding down spending, and ministers intent on preserving their domains. They were also trying to limit budgets without reigniting the unrest that rocked the government and hit growth in the 1995 fourth quarter.

Finance Minister, Mr Jean Arthuis said the 1997 budget contained Ffr60 to Ffr62 billion of savings spread among most ministries and called the public spending freeze unprecedented.

"This will enable us to respect our objective, to hold the public deficit in 1997 to 3 per cent of GDP," he said.

France needs to bring public deficits down to 3 per cent of GDP to meet tough criteria in the Maastricht treaty on joining a single European currency in 1999.

Budget Minister, Mr Alain Lamassoure said the savings would allow tax cuts from 1997, enabling Mr Juppe to keep a promise made earlier this year.

"It will make possible a cut in taxes, a lowering of the fiscal pressure, which the French people are expecting, which the French economy needs and which will also qualify France for European monetary union on January 1st, 1999," Mr Lamassoure said.

He gave no figures for the tax cuts.

The newspaper Le Monde reported the tax cuts would amount to about Ffr20 billion, mostly in income taxes. The government was also studying ways to make a gesture towards poorer households which do not pay income tax, the paper said.

France's socialist opposition denounced the new budget, saying in a statement it would hurt growth and increase unemployment, and that it was likely to leave France's deficits well above the 3 per cent of GDP allowed by Maastricht.

The budgeted savings include about Ffr1 billion from a cut of 6,500 to 7,000 civil service jobs, Ffr15 to Ffr20 billion carved out of employment subsidies, about Ffr1 billion each from four of five largest ministries and "substantial" reductions in housing aid.

Mr Lamassoure also said the government would save "several billion francs" from lower debt service charges due to falling interest rates, but he did not say where the rest of the savings would be found.

President, Mr Jacques Chirac said the French people's will had been respected in the 1997 budget and that education, justice, health and labour spending would rise.

But economists are sceptical that the spending cuts will be enough for France to meet the 3 per cent target due to a slowdown in the economy, which will hit revenue.

In the latest of a spate of reduced forecasts by economists, state owned bank Caisse des Depots et Consignations this week said GDP fell about 0.1 per cent in the second quarter, reflecting a rise in unemployment and weaker industrial output.

Mr Arthuis said in a radio interview after the cabinet meeting that the French economy grew 0.9 per cent in the first six months of 1996, implying economic contraction in the second quarter and leaving open the question whether the economy has begun to expand in the second half, as hoped for.