France Defies EU Partners With 'No Austerity' Budget

(Reuters) - France laid down the gauntlet to EU partners on Wednesday with a 2015 budget setting out how it would bring its borrowing back to within EU limits two years later than promised, a retreat it blamed on a fragile economy.

"We have taken the decision to adapt the pace of deficit reduction to the economic situation of the country," Finance Minister Michel Sapin told a news conference.

"Our economic policy is not changing, but the deficit will be reduced more slowly than planned due to economic circumstances - very weak growth and very weak inflation."

Under the budget plan, the public deficit is set to fall from 4.4 percent of output this year to 4.3 percent next year, 3.8 percent in 2016 and 2.8 percent in 2017 - below the EU-mandated threshold of 3 percent.

Previously, France had promised EU partners it would bring its deficit below 3 percent by next year, a deadline that had already been extended from 2013.

"No further effort will be demanded of the French, because the government - while taking the fiscal responsibility needed to put the country on the right track - rejects austerity," the budget statement said.

Sapin, who earlier this month conceded that the 2015 deficit target was untenable, reaffirmed forecasts that the euro zone's second largest economy would grow at a modest 1.0 percent next year, rising to 1.9 percent in 2017.

It described its effort to shave 50 billion euros off projected public spending volumes between now and 2017 as "unprecedented" - while acknowledging the total volume of public spending would still rise by 0.2 percent over the period.

That would imply public debt ticking up to a peak of 98.0 percent of output in 2016 before a slight fall in 2017. French public spending and the total tax burden - among the highest in the world - would fall only modestly as a result.

The so-called structural deficit, a figure closely watched by EU budget watchdogs as it strips out the effects of the economic cycle, will fall less than hoped by France's partners from 2.2 percent of output in 2015 to 1.4 percent in 2017.

Incoming European Commission President Jean-Claude Juncker is now under pressure to react firmly enough to avoid a further loss of confidence in the bloc's already battered budget rulebook. His options include sanctions including hefty fines.

Advocates of budgetary rigor led by Germany believe the time has come for France to taste some of the fiscal austerity and painful structural reform already undertaken by its southern neighbors in the wake of the 2009-2012 debt crisis.

But Paris can count on allies in Rome, Athens, Dublin, Madrid and elsewhere to support its argument that further austerity would be counterproductive by snuffing out the fragile start of recovery across the euro zone.

President Francois Hollande has charged Sapin and Prime Minister Manuel Valls with imposing spending caps on individual ministries and Sapin said he would recoup a further four billion euros in French public asset sales to pay off debt.

In a bid to return some cash to the pockets of low-earners, the budget will also cancel the existing lowest income tax band - a move to be funded with tax proceeds elsewhere.

Despite its fiscal woes, France continues to lend at historically low rates - the yield on its benchmark 10-year bond was unchanged around 1.289 percent in early Wednesday trade.

In an interview with Les Echos newspaper, former conservative Prime Minister Francois Fillon - a possible presidential candidate in 2017 - warned nonetheless that France was "on the verge of serious financial accident."