The French government yesterday unveiled a budget for 2008 that does almost nothing to bring the public finances closer to balance only days after the prime minister warned the country was "bankrupt".
The first budget under Nicolas Sarkozy's presidency confirms France's intention of putting on hold efforts to trim its public deficit and debt, despite the protests of its eurozone partners who wanted Paris to stick to promises made by the previous government.
The European Commission, which declined to comment on the budget yesterday, is considering issuing a formal notice to France to stick to its undertaking.
It would be the first use of the "early advice notice" procedure under the EU's revised fiscal rules. However, France is likely to brush off any such intervention that has no legal or political consequences.
The budget confirms the standstill on fiscal consolidation even though François Fillon, the prime minister, warned that France was "bankrupt" and its finances were in a "critical" state.
Public spending is frozen in real terms. But the budget earmarks €9bn ($12.7bn, £6.3bn) for tax cuts promised during the election campaign and passed into law during the summer. These include €5.1bn to exempt overtime from tax and social charges, probably the only measure in the budget that approaches a structural reform.
Mr Sarkozy said the budget aimed at "making work pay to increase wealth and growth".
But Philippe d'Arvisenet, chief economist at BNP Paribas, said the government was sending out confused messages. On the one hand, it was talking the language of rigour, on the other it was bringing to a halt three years of fiscal consolidation.
The government is banking on what many economists believe is an ambitious forecast for growth next year - of between 2 and 2.5 per cent - to keep its deficit more or less the same, at €41.7bn. That is only a small improvement of €300m on this year's predicted overspend.
It envisages a public deficit of 2.3 per cent in 2008, down from 2.4 per cent this year. France's debt will remain above 64 per cent until 2009. France has already delayed by two years to 2012 its promise of a zero deficit but even this appears to be conditional on the economy growing by at least 2.5 per cent.
Mr Sarkozy is determined to retain as much room for manoeuvre as possible as he prepares to press ahead with contentious welfare and labour reforms, followed by liberalisation of some services, professions and product markets. The Elysée hopes that €9bn of tax cuts next year will help to buy support for reform while demonstrating that the president is true to his word.
But Laurence Boone, chief economist for France at Barclays Capital, said the tax cuts would probably boost growth by only 0.2 per cent next year at most. "The lack of structural measures is what will worry our European partners most," she said.
The government has vowed to press ahead with pension reforms next year. Mr Fillon has set an ambitious target of wiping out the pension deficit in the social security system by 2012, rather than 2020.
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