Deficit-cutting French budget to test Hollande credibility

France will present its 2013 budget Friday with President Francois Hollande's credibility on the line as he seeks to rein in public finances and reassure financial markets without stirring public anger, AFP reports. For his first annual budget since being elected in May, Socialist Hollande is to focus on tax hikes instead of painful spending cuts, despite warnings from economists that state expenditure is unsustainable given the sluggish economy. About 30 billion euros ($39 billion) in savings are needed to reach Hollande's ambitious target of reducing the deficit to three percent of gross domestic product by the end of 2013 from a forecast of 4.5 percent this year. At stake is France's image in the troubled eurozone and its relationship with fellow European powerhouse Germany, with markets anxious to see if Hollande's government is willing to pull its weight in implementing tough reforms. France has so far been spared the rise in government borrowing rates hurting fellow eurozone members such as Spain and Italy, instead paying historically low interest rates as investors look for safer havens. But signs that Hollande is not taking deficit-cutting seriously could see the markets turn on France, lumping in Europe's second-largest economy with its struggling southern neighbours and sending borrowing costs up. Barring a surprise economic turnaround, economists are sceptical Hollande will be able to meet his targets. "In any case, we won't reach it," said Eric Heyer, an economist at the French Economic Observatory in Paris. "If you really want to get to three percent (of GDP), you need a new eight-to-nine-billion-euro austerity plan." After defeating incumbent right-winger Nicolas Sarkozy on a growth and jobs platform, Hollande has been keen to avoid any appearance that his government is pushing austerity. But the government has already had to revise its growth forecast for this year to 0.8 percent and Hollande's popularity has been on the decline, with his approval rating dropping below 50 percent in August. Unions and left-wing groups have threatened strikes and protests if the Socialists impose too much austerity, with a protest already planned for Sunday against the EU fiscal pact that sets strict deficit limits. Public demonstrations in Spain turned violent this week, with police beating and firing rubber bullets at angry protesters, as Madrid prepares an austerity budget for 2013. In a speech last month, Hollande said that to reach his goal the budget would target 10 billion euros in extra taxes on high-income households, 10 billion from taxes on businesses and 10 billion in spending cuts. The budget is expected to introduce a fiscal reform taxing capital gains, interest and dividends as regular income, as well as a populist move to impose a 75 percent tax rate on incomes above one million euros. Finance Minister Pierre Moscovici made it clear this week that austerity was not the government's top priority, saying: "We are not a government wielding a fiscal truncheon." But Moscovici, considered more fiscally conservative than many of his fellow Socialists, also said it was vital for France to stick to its deficit targets. "If we don't stand by the three percent, the markets will say 'They are not serious, they are not credible' and boom, our interest rates will increase like they did in Spain," he said. Signs continued to show the French economy mired in gloom in the days ahead of the budget's release. Figures released Wednesday showed unemployment topping three million for the first time in over a decade in August, with the number of jobless up by 23,900 from July. Other data this week showed French consumer confidence slipping and overall business sentiment remaining gloomy in September. And there are no indications the sluggish economy is picking up speed, with the central bank this month predicting GDP would contract by 0.1 percent in the third quarter after flat-lining for the first half of the year.