December 18, 2012 / 7:13 PM / 7 years ago

ECB'S Praet says France must cut spending and reform

PARIS (Reuters) - France must cut spending to meet its budget deficit target and undertake structural reforms to boost competitiveness, European Central Bank Executive Board Member Peter Praet said on Tuesday.

President Francois Hollande has pledged to slash the public deficit to 3 percent of economic output next year from an estimated 4.5 percent this year, but has so far shied away from deep-reaching spending cuts many economists say are necessary.

In an interview with French daily Le Figaro, Praet said the government’s deficit-cutting plans relied too much on tax rises, and that over the long term it was vital to implement reform.

“France has too often resisted change,” Praet said.

“There is a consensus now in France on the need to improve public finances and competitiveness. To do that, structural reform is needed.”

France’s Socialist government launched a public spending review on Tuesday, but stopped short of outlining budget cuts, focusing instead on streamlining administrative procedures in order to find savings.

At 57 percent of GDP, France’s public spending is among the highest in the developed world, and Praet said deeper measures were needed to change the structure of outlays to keep finances on track.

Last month’s decision to cut labour costs by introducing tax rebates for companies was a step in the right direction, he said, but the move was financed by tax rises such as a hike in VAT which would ultimately limit its impact.

Moody’s rating agency last month stripped France of its triple-A credit rank, warning it would downgrade the country’s debt further if the government failed to implement reforms such as a labour market overhaul.

The agency said the growth forecasts built into the government’s medium-term budget plan were overly optimistic, and changes need to be made to rigid labour laws and to goods and services markets to make the country more competitive.

France’s growth forecast of 0.8 percent for next year has been questioned by economists, given that the broader euro zone economy has slipped into recession.

Praet said that despite the economic downturn, France and other countries in the bloc should not back away from meeting a 3 percent deficit target.

Reporting by Vicky Buffery; Editing by Daniel Flynn

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