By Leigh Thomas
PARIS (Reuters) -French Prime Minister Michel Barnier came under pressure on Wednesday to clarify how he will plug a gaping hole in the public finances as the central bank and public audit office warned spending cuts and tax hikes are inevitable.
Barnier only took office earlier this month, but already finds himself facing a growing budget crisis as tax income comes in weaker than expected and spending higher than planned, pushing France's deficit reduction targets out of reach.
"The budget situation that I have discovered is extremely dire," Barnier said in a statement, adding that he was seeking more information to establish the "exact reality".
Barnier, a veteran conservative politician and former EU Brexit negotiator, is running out of time to name a finance minister and hand lawmakers a 2025 budget bill, which the law in theory requires by Oct. 1 although some wiggle room is possible.
But to rein in France's worse than expected budget deficit, Barnier must tread carefully to not irritate opposition parties who could join up and topple his government with a no confidence motion in the deeply divided parliament.
TOUGH CHOICES
Barnier's options are simple - cut spending, raise taxes or take more time to cut the deficit - but calibrating the mix to placate opposition lawmakers is hugely complex.
The least politically contentious option is to seek more time from the European Commission and France's EU partners to bring its deficit in line with the bloc's 3% of GDP limit, pushing it several years beyond the current 2027 target.
The head of the public audit office, Pierre Moscovici, said sticking with the current target of meeting the EU limit in 2027 would require 100 billion euros ($111 billion) in spending cuts, throttling growth in the euro zone's second-biggest economy.
"We need to be more realistic, it seems to me. I think the European Commission would always prefer the truth is told and that targets are realistic rather than untenable," Moscovici said.
Moscovici, a former EU economics commissioner, called for targeted budget savings rather than broad cuts and said France had little room to raise taxes further as they were already among the highest in the world.
In addition to seeking more time, central bank governor Francois Villeroy de Galhau said the deficit-reduction drive should consist of three-quarters of budget savings and one quarter tax increases.
However, Barnier's own conservative Republicains party has said tax hikes are a red line and even some of President Emmanuel Macron's own lawmakers are reluctant to see his legacy of tax cuts rolled back.
Outgoing Interior Minister Gerald Darmanin said he could not support a government that hikes taxes when he stands down and returns to parliament as a lawmaker in Macron's camp.
"Let's not break the economic machine, taxes are an easy way out," Darmanin said on France 2 television. "We think budget cuts also have to be found."
Macron has reduced the French tax burden by 55 billion euros since he first came to office in 2017, which leftwing parties say has been a gift to the wealthy and big companies and should now be reversed.
"Completely excluding tax hikes is not realistic," Villeroy told BFM TV on Wednesday, adding an "exceptional effort" should not be excluded by corporate and well-off taxpayers as long as the deficit is above 3% of GDP.
Barnier has so far been ambiguous about where he stands, saying shortly after being appointed that France needs more tax justice and saying on Wednesday taxes were already heavy.
"My objective is to return to growth and improve the French people's standards of living at time when we are already the country where the tax burden is the highest," Barnier said.
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