UPDATE 3-France to keep spending capped but eyes tax cuts
(Rewrites with Raffarin, more Lambert quotes)
By Catherine Bremer
PARIS, May 5 (Reuters) - France vowed on Monday to keep 2004 budget spending capped at 2003 levels, as it braces for a telling-off from Brussels over the hole in its public finances but said it still intended to go ahead with tax cuts.
Grappling with a sluggish economy and a public deficit that has smashed through euro zone limits, Budget Minister Alain Lambert said he would push for a zero rise in spending in the budget, to be outlined in letters to ministries this week.
Prime Minister Jean-Pierre Raffarin said that controlled spending within the various ministries meant the government could still make good on its election pledge to cut taxes.
"France will not spend more in 2004 than in 2003. Thanks to controlled spending, we will be able to continue reducing taxes and charges in order to help growth and employment," Raffarin told deputies during a seminar on pension reform.
"I want each ministry to work out a cost-cutting plan which will enable us to finance our priorities," he added, repeating that he was still counting on 1.3 percent growth in gross domestic product this year and 2.5 percent in 2004.
The government promised in its election campaign a year earlier to cut income and company taxes by a third from mid-2002 to 2007.
The 2004 budget bill is due to be presented in September but Raffarin's office will send pre-budget letters to ministers this week in which he sets basic rules on public spending.
Confirming media reports that the state will cut public sector jobs to save money, Lambert said he backed the idea of replacing just one in two retiring civil servants, but did not confirm this would be official policy in the 2004 budget bill.
"The idea of not replacing all retiring public sector employees is about good managment," Lambert told BFM radio.
"There's no point taking on for 60 years -- 40 years of work and 20 years of pension -- staff that aren't necessary given the automation of certain ministerial tasks," he said.
An estimated 60,000 civil servants will retire in 2004.
FRANCE UNDER EU PRESSURE
The European Commission will tell France this week it has until Oct. 3 to take steps to rein in a public deficit that exceeded a euro zone limit of three percent of gross domestic product in 2002 and could swell to 3.4-3.6 percent this year.
France posted a deficit of 3.1 percent last year, and Finance Minister Francis Mer has promised to reduce that to 2.9 percent in 2004.
"If we say we think we can come back to 2.9 percent, it's because we believe that. It's very hard to guarantee receipts, but spending is down to will. The government is determined to cap spending so that not one euro more is spent than is authorised by parliament," Lambert said.
The government has worked on the basis that outlays could rise by about 0.3 percentage points a year beyond the rate of inflation -- a margin Lambert wants to eliminate, saving in the region of 700 million euros, according to one senior official.
Lambert also insisted that tax cuts would not go counter to the government's drive to reduce the public deficit.
"Tax cuts have been financed by spending cuts, so they have not in any way been responsible for the deficit," he said.
"Tax cuts have enabled us to maintain purchasing power and I am convinced we will get back a good part of the tax cuts in consumer spending -- which has been the only motor of growth."
Raffarin said in an interview with a French regional newspaper that he hoped French economic growth would rise to a pace of 2.5 percent near year-end, but said this depended in part on the euro's exchange rate versus the dollar.
"We hope growth will get back to an annualised pace of 2.5 percent at the end of the year. But growth also depends on other things such as the euro-dollar rate of exchange," he said.
The comments, to be published on Tuesday, suggested, albeit not explicitly, Raffarin is concerned business may be hurt by the euro's rise to four-year highs at over 1.12 dollars <EUR=>.
The EU has pencilled in deficits of 3.7 percent and 3.6 percent in France for 2003 and 2004 but said it would give Paris the benefit of the doubt given planned deficit-cutting measures.
The Brussels-based body is set this week to formally call on France to take corrective action by October to cut its deficit.
Copyright 2003, Reuters News Service