Aug. 25 (Bloomberg) -- French President Nicolas Sarkozy’s budget cuts announced yesterday marked just a first step in meeting deficit targets.

That’s because his growth forecasts remain too optimistic even after they were lowered yesterday, said economists including Bruno Cavalier, chief economist at Oddo & Cie. in Paris.

Prime Minister Francois Fillon yesterday announced 12 billion euros ($17 billion) of measures in 2011 and 2012 and said the euro region’s second-largest economy will expand by 1.75 percent in each year. The deficit will be 4.5 percent of gross domestic product in 2012, when Sarkozy seeks re-election, beating the target.

“I really doubt France will make 1.75 percent next year. My forecast is 1.1 percent and that means the shortfall will then be about 10 billion euros,” said Cavalier. “Once the election is over, it will be much easier to pass extra austerity measures.

Sarkozy, like President Barack Obama, must balance his re- election bid against the need to fix his nation’s finances. France, the second-biggest contributor to euro bailout funds, now pays a premium of 67 basis points over Germany to borrow for 10 years, up from 27 basis points when the rescue system was set up in May 2010. Germany forecasts a balanced budget by 2014.

Sarkozy’s budget cutting became urgent this month when speculation mounted that France was vulnerable to the euro-area debt crisis after the U.S. was downgraded by Standard & Poor’s. Fillon cut forecasts of economic expansion from 2 percent in 2011 and 2.25 percent in 2012.

Addressing Doubts

The government’s announcement yesterday ‘‘came on time because there were doubts on the deficit targets,” said Jean- Christophe Caffet, an economist at Natixis in Paris in an interview.

Caffet forecasts 1.2 percent growth in 2012, pointing to further cuts to meet deficit targets.

“There is a crisis of public debt in industrialized nations and the U.S. economic slowdown is slowing our own economy,” Fillon said late yesterday on TF1 television. “Eighty-three percent of the measures in this plan are aimed at big companies, owners of capital and wealthy households. We aimed for measures that were not going to break growth.”

‘Patchwork’

Socialist presidential contender Francois Hollande called Sarkozy’s policies a “patchwork” that fail to address fundamental issues. A CSA poll released today showed 47 percent of French voters believe Hollande would do a better job of reducing debt than Sarkozy, who was backed by 35 percent.

French economic growth stalled in the second quarter. Jobless figures for July to be released today are likely to be “as bad as in the two previous months,” Labor Minister Xavier Bertrand said on France 2 television. “When there is no economic growth, it’s tough to lower unemployment,” he said.

Fillon repeated pledges to reduce the deficit, which reached 7.1 percent of GDP in 2010. It is targeted to drop to 5.7 percent this year and 3 percent by 2013. Debt will peak at 88 percent of GDP in 2013, the International Monetary Fund says.

Spending will be cut by 500 million euros this year and 1 billion euros in 2012, Fillon said, without providing details.

Measures to raise revenue include a 3 percent surcharge on those earning more than 500,000 euros, in addition to higher taxes on capital gains, alcohol, tobacco, sugared drinks and better-than-average private health-care plans.

The steps may still not be enough to avoid a French downgrade, said Jennifer McKeown, an economist at Capital Economics Ltd. in London, who sees 2012 growth at 0.5 percent.

Rating Risk

“They are unlikely to prevent France losing its AAA credit rating in the end,” she said in an e-mailed note. “France’s top-notch credit rating remains on shaky ground. And perhaps most importantly, the greatest risk to France’s public finances still stems from outside the country. With Italian and Spanish government debt amounting to 130 percent of French GDP, France can ill afford to bail either out.”

Pierre Salaun, the spokesman for France’s debt management agency AFT, said “all three rating agencies maintained their triple AAA with a stable outlook, even before Fillon announced the extra deficit cuts measures” in a telephone interview.

Raising Revenue

The biggest revenue raiser would yield 2.2 billion euros next year and 200 million euros in 2011. The measure would cancel the capital-gains exemption from property sales, excluding the principal residence. A stricter inflation-based standard will be applied to the calculation.

Another 1.5 billion euros will be generated next year, and 500 million euros this year, by limiting companies’ ability to carry over losses as tax write-offs to one year. And 1.5 billion euros in the next two years will come from a tax increase on capital gains.

The exceptional levy on the wealthy, which will remain until France’s deficit reaches 3 percent of GDP, will generate about 200 million euros next year. Fillon called the tax a symbol to show “solidarity.”

Sixteen French business leaders including the chief executive officers of Accor SA, L’Oreal SA, Total SA, Societe Generale, Air France-KLM Group and Publicis SA published an open letter Aug. 23 volunteering to pay more taxes as an exceptional and temporary measure.

“At a time when the government is asking for solidarity, it seems necessary for us to contribute,” they said in the letter published in Le Nouvel Observateur magazine.

‘Fairness’

The emphasis on what Fillon called “fairness” is “a necessary feature to avoid street protest, with higher taxes for both household and corporations,” Dominique Barbet, an economist at BNP Paribas in Paris, said in an interview.

The sales tax at amusement parks, such as Euro Disney SCA’s Disneyland Paris, will be raised to 19.5 percent from 5.5 percent.

The cost of cigarettes will rise by about 6 percent this year and again next year, yielding 700 million euros. The imposition of a tax on sugared drinks will yield 100 million euros. The tax on alcohol excludes wine, rum and local products.

--Editors: James Hertling, Craig Stirling

To contact the reporter on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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