Single currency calls the budget tune for Chirac

French travails: Maastricht rules and tax cuts dominate finances, while the ruling coalition frets over its electoral prospects

Paris - The French government nailed its colours to the mast of a single European currency yesterday, publishing a draft budget for 1997 that envisages a reduction in the domestic deficit to the 3 cent of gross domestic product required to meet the Maastricht criteria, writes Mary Dejevsky. It also offers a start to a promised five-year programme of tax cuts.

Approving the draft at yesterday's cabinet meeting, President Jacques Chirac said the budget was "compatible with France's European commitments and in line with the objective of harmonising French and German policies". He said it was the first time a real effort had been made to halt the rise in public spending.

The projected deficit for 1997 is 283.7bn francs (pounds 184bn), out of Fr1,552.9bn in total spending. The expenditure figure is the same as that planned for the current year, meaning that there is to be a small reduction in real terms, allowing for inflation. The deficit is to be reduced partly by cutting public spending through ministerial budgets, modest public- sector job cuts and the delegation of some spending to regions. A big contribution to the cause of cutting the deficit, however, will be made by a deft piece of accounting. The draft budget confirms that Fr37.5bn, the entire assets of France Telecom's pension fund, will be transferred to the exchequer, in a move that may well be contested by Brussels.

An even riskier aspect is the projected reduction in the indebtedness of the social-security fund, to a total of Fr30bn, from more than Fr50bn. One of the social-security reforms introduced by the Prime Minister, Alain Juppe, last year was to bring the system into the overall state budget. It had been separately administered, with the government advancing credit to cover a deficit over which it had little control. Whether this change will enable the government to curb health spending by as much as it hopes is widely questioned.

Cash from France Telecom and various economies has allowed Mr Juppe to begin the tax cuts he promised in an attempt to boost consumer spending. Outlines of a tax-cutting programme were presented on television by Mr Juppe two weeks ago in a piece of public relations that was received sceptically by the public.

The first stage of income-tax cuts, confirmed yesterday, raises the threshold at which the tax is paid, to try to help the low-paid. A small start has also been made to reducing the top rate of tax, from 56.8 to 54 per cent, and raising the level at which it becomes payable, reflecting the government's concern that wealthy and high-earning individuals may be choosing to move abroad. What is given with one hand, however, is being taken with the other - 8 per cent on a packet of cigarettes, up to 25 per cent on most alcohol, 7 centimes on a litre of petrol, and hefty increases in local taxes.

In response, critics from right and left were unanimous that not enough was being done to restore economic confidence, and the announcement had little effect on the franc.

Leading article, page 15