Fall-out at the top reveals French finances in freefall

A deepening crisis in French public finances has exposed a growing rift between President Nicolas Sarkozy and his Prime Minister, François Fillon.

M. Fillon, criticised at the weekend for saying that the French state was "bankrupt", is believed to be pushing for an "austerity" programme to reduce public spending.

He has at least partially aligned himself with the European Central Bank governor Jean-Claude Trichet and other EU governments who are anxious about President Sarkozy's relatively cavalier attitude to European Union rules on public debt.

In a radio interview yesterday M. Fillon said that an accumulated ¿1trn (£700bn) debt made French public finances "no longer sustainable". His government later announced measures to reduce a shortfall of nearly ¿12bn – 50 per cent higher than expected – in the health, pensions and unemployment budget. Amongst other things, French people will be expected to make a slightly higher personal contribution for some kinds of health treatment.

M. Fillon's government will today announce its overall national budget for 2008, which will, on paper, meet President Sarkozy's target of a deficit of 2.3 per cent of gross domestic product (GDP) next year (which itself overshoots the EU target).

To make the books balance, Paris is assuming a growth rate of 2.25 per cent this year, far higher than independent forecasts. It has also "brought forward" more than ¿1bn in taxes from 2009, a piece of creative accounting which is unlikely to please Brussels and other EU governments.

Over the past three days, M. Fillon has made a series of public pronouncements in which he has made it clear that such book-keeping tricks are no longer sustainable. He has suggested that reducing the public debt should become a government priority. In Corsica last Friday, he said that France was "bankrupt".

President Sarkozy accepts the need for a radical reduction in state spending in the long term but wants to push ahead, cautiously, with his promised deep reforms of the French "social model". He does not want to be forced into emergency spending cuts, which could damage an already faltering economy and generate opposition on the streets.

In effect, the President is paying the price for a first failed experiment in "Sarkonomics". He gambled soon after his election in May on a ¿12bn package of tax cuts, mostly benefiting the wealthy or reasonably well-off. This was supposed to kick-start the economy but its main effect has been to increase the black hole in public finances.

Le Monde newspaper said yesterday that there was now a clear divergence between the two top men in economic thinking. The President and his advisers in the Elysée Palace were still thinking in terms of "relaunching" growth by boosting spending power and demand. M. Fillon, backed by the Finance Minister, Christine Lagarde, and M. Trichet, wanted an "austerity" cure.

* In an interview with The New York Times, M. Sarkozy said France would be ready to rejoin Nato's military command structure provided top positions were reserved for the French in the proposed European defence integration. The French, under President Charles de Gaulle, abruptly withdrew from Nato's command in 1966 and negotiations to bring the French back into the fold since then have foundered.