France to unveil budget to help "bankrupt" finances

PARIS, Sept 26 (Reuters) France is expected to unveil on Wednesday a 2008 budget with hefty tax breaks but few spending cuts just days after the prime minister warned that the country was bankrupt.

France has run into trouble with its European partners for falling behind on its promises to cut its deficit and debt but the budget is not expected to ease those concerns.

President Nicolas Sarkozy has argued the government needs extra time to push through reforms that will bring a ''growth shock'' to help the economy and improve government finances.

''France's economic policy is to free up work, free up innovation to boost growth,'' he said on Tuesday night.

''With that we will have more growth, more jobs, more receipts and smaller deficits.'' His first budget will include 15 billion euros ( billion) of tax cuts, fulfilling electoral pledges, some of which will be offset with a cut in the number of civil servants next year.

Analysts say more savings will be needed if the government is to meet its budget targets since growth has been hurt by a strong euro and a worsening outlook for the global economy.

The budget is expected to forecast a deficit of 41.7 billion euros, or 2.3 percent of gross domestic product, a modest improvement from the expected shortfall of 2.4 percent of GDP this year.

But meeting this forecast depends on growth of between 2.0 percent and 2.5 percent this year and the next, which critics say could be hard to achieve.

CRITICAL STATE The discussion over the budget has stirred divisions between Sarkozy's office and Prime Minister Francois Fillon over how to convince the public of the need for reform.

Fillon has preferred shock tactics, warning of bankruptcy and saying that the public finances were in a ''critical state''.

Newspapers have reported that Sarkozy was disappointed with Fillon's approach, but others have suggested his comments were deliberately provocative to win over workers and union leaders who have often derailed previous attempts at reforms.

Sarkozy has already moved ahead on the 15 billion euro fiscal package which includes tax breaks for students, homeowners and to encourage longer working hours.

Opposition Socialists say the tax cuts only help the rich and will worsen public finances while European Central Bank President Jean-Claude Trichet said last Sunday: ''France's finances are in very great difficulty and that's a fact.'' French finances have been worsened by a growing hole in the social security deficit, which together with the local authority and central government defict, makes up the overal defict.

The government was also forced to revise upwards its debt numbers for last year to take into account 8.2 billion euros owed by the SNCF state rail company.

That forced an upward revision to the government debt forecast for this year, now 64.2 percent of GDP, and to 64.0 percent in 2008, both higher than the EU's 60 percent limit.

REUTERS MP GC1423