Public finances in critical state, says French PM

France's public finances have reached a "critical" state and are unsustainable, François Fillon, the French prime minister, said yesterday as the government took measures to plug a yawning gap in its welfare budget.

Mr Fillon showed no intention of rowing back from the political furore he triggered last week when he suggested France was "bankrupt".

He made his comments as ministers said they would impose social charges on dividend payments, double the tax on early retirement packages and raise prescription and other medical charges. These measures are designed to help contain an annual social security deficit at €8.9 billion, which would otherwise hit €12.7 billion next year.

France's pay-as-you-go compulsory insurance system covers health, pensions and unemployment benefits.

Its financial shortfall has grown by almost 50 per cent in two years to €11.7 billion this year, and is 50 per cent higher than the government itself predicted less than a year ago. The hole has to be filled if France is to reduce its overall public deficit to zero by 2012, as promised to its euro-zone partners.

The government is due to announce its budget for 2008 tomorrow and is forecasting a modest reduction in its deficit for next year to 2.3 per cent. But its plans are looking increasingly ambitious as growth slows and the turbulence in the financial markets begins to take its toll. The government has already downgraded its growth forecast for 2008 to 2-2.25 per cent, from 2-2.5 per cent, but has left its deficit projection unchanged.

Likewise, the government is banking on growth of 2.25 per cent and wage growth of 4.8 per cent, and therefore higher contributions, next year to narrow the social security deficit.

These figures could well turn out worse, leaving the deficit to swell again.

Mr Fillon was accused of being alarmist when he used the word "bankrupt" to describe France's public finances. The opposition socialists claimed he was "softening up public opinion for the austerity measures that would follow".

The prime minister has in recent weeks found his voice in a government otherwise dominated by a hyperactive president, Nicolas Sarkozy, by acting as the custodian of its reform agenda.