2nd UPDATE: French 08 Budget Gap Widens To Record High Level

2nd UPDATE: French 08 Budget Gap Widens To Record High Level
    (Adds background, analyst comment.)     By Geraldine Amiel and Gabriele Parussini    Of DOW JONES NEWSWIRES  

PARIS (Dow Jones)--France's budget deficit reached a record-high level in 2008, cutting the government's room for stimulus as the country's economy shrank at the sharpest rate in over 30 years in the fourth quarter.

In 2008, the French deficit widened to EUR56.2 billion, or 2.9% of gross domestic product, compared with EUR34.72 billion a year earlier, due to higher spending and lower receipts, the ministry said Friday.

"The economic cycle is taking a heavy toll on the deficit," said Jean-Christophe Caffet, an economist at Natixis in Paris. "It's not going to get any better."

Budget Minister Eric Woerth said last month that not only was the deficit up year-on-year, but that it is also EUR4.7 billion larger than the figure the government forecast in December.

The government of President Nicolas Sarkozy has passed a EUR26 billion stimulus package to kickstart the economy, but is grappling with a worsening streak of economic data.

GDP contracted 1.2% in the last quarter of 2008 from the previous three months, the government said late Thursday, more than analysts had forecast.

French Finance Minister Christine Lagarde said that the recession the country is facing, with GDP expected to shrink 1.0% this year, is worse than the recessions in 1993 and 1975, when GDP contracted 0.9% and 1.0%, respectively.

The shrinking economy is making unemployment shoot back up, after years of easing.

People marched in protest through the country's major cities Jan. 29 to protest the government's handling of the crisis in numbers not seen since 15 years ago, when a massive strike forced the government to withdraw a pension reform.

French unions as well as the socialist opposition are asking the government to put more money into people's pockets instead of focusing the stimulus plan on investment.

But with the state of public finances worsening, that may be easier said than done, said Caffet, who forecast for this year a deficit to GDP ratio of 5.3%.

The deficit figure includes a special account of the state's financial stakes, the ministry outlined. Excluding the special account, France's budget deficit in 2008 amounted to EUR56.5 billion, compared with EUR38.4 billion in 2007.

In 2008, budget spending increased to EUR278.23 billion, up 2.8% from EUR270.63 billion a year earlier, while receipts amounted to EUR221.38 billion, down 4.8% from EUR232.44 billion a year earlier, the ministry said.

Tax receipts in 2008 were lower than initially forecast in the budget bill, and the shortfall is estimated at EUR11.5 billion from the initial budget bill, or EUR4.5 billion from the revised bill in December, the minister also explained at the time.

Ministry Web site: www.minefe.gouv.fr

-By Geraldine Amiel and Gabriele Parussini, Dow Jones Newswires; +33 1 40171740; [email protected];

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(END) Dow Jones Newswires

February 13, 2009 05:40 ET (10:40 GMT)

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