French squeeze to qualify for single currency

THE French government yesterday cut its growth forecast for 1997 but showed it was still going all out to reduce its public sector deficit in time to qualify for a single European currency.

Finance Minister, Mr Jean Arthuis, reaffirmed that France would cut its deficit to 3 per cent of gross domestic product next year. "We will reach the target of 3 per cent" he told a news conference.

He revised down his 1997 growth forecast to 2.3 per cent from 2.8 per cent, though he also said he believed France would still meet its forecast of 1.3 per cent growth this year, despite a downturn in the economy in the second quarter.

Despite the slower growth, private economists say they are guardedly optimistic France may near the 3 per cent deficit target next year, a factor reflected in financial markets, which have called off a tentative attack on the franc.

They noted that while the government was seeking to boost consumer confidence by promising 25 billion francs (£3.02 billion) in income tax cuts next year, the net giveaway is actually much smaller.

Seven billion francs are being raised in extra taxes to help fund the welfare system, mostly through higher taxes on savings.

And economists estimate that anything between five and 10 billion francs more will be recouped through higher duties on alcohol, cigarettes and, to a lesser extent, petrol.

Mr Arthuis confirmed yesterday that the increase in petrol duties would be limited to the rise in inflation, but said there would be additional taxes on alcohol and tobacco.

Part of the proceeds from this would be used to fund the welfare system.

Government ministers declined to comment on the size of these increases on alcohol and tobacco.

Duties on alcohol have not been raised since 1993.

"At the end of the day, people are not going to have a lot more money in their pockets," Smith Barney economist Mr Steve Englander said. "It's not a tax cut, it's a tax shuffle."

The Socialist and Communist opposition and trade unions dismissed the tax reform as a ploy by a conservative government which has already increased taxes by 120 billion francs.

"This is a 25 billion franc exercise in electoral demagogy after having taken 120 billion francs away from households," former Socialist budget minister, Mr Henri Emmanuelli, said.