Embattled France unveils budget cuts and tax hikes

With France under threat of seeing credit agencies downgrade its prized triple-A rating, Prime Minister Francois Fillon announced budget cuts and tax hikes to keep France's finances on track after slashing its 2012 growth forecast from 1.75 percent to 1.0 percent.

The new measures come as Sarkozy seeks to shore up his economic credentials with only six months to go before the presidential election, with polls showing him lagging badly behind Socialist challenger Francois Hollande.

The extra €7 billion in savings for 2012 come on top of August's €12 billion ($16.4 billion) deficit-cutting package that raised taxes on the rich and closed tax loopholes.

Fillon said France is seeking to save €100 billion overall in order to balance its budget by 2016. The new measures announced on Monday will bring an additional €17.4 billion in savings in 2012-2016, he said.

"We have only one goal -- to protect the French people from the serious difficulties that many European countries are now facing," Fillon told a press conference.

"Our citizens are now aware of the risks to our livelihoods and futures caused by deficits and debt. Bankruptcy is no longer an abstract term. Our financial, economic and social sovereignty require prolonged collective efforts and even some sacrifices," he said.

The government's flagship reform of raising the retirement age from 60 to 62 will be brought forward from 2018 to 2017, he said, which will produce savings of about €4.4 billion by 2016.

The reduced Value Added Tax (VAT) on some goods and services will be raised from 5.5 percent to 7.0 percent, except on essential goods such as food.

Introduced in 2009 as part of economic stimulus measures, the reduced rate saw VAT lowered from 19.6 percent for businesses including restaurants and hotels.

Corporate taxes will be temporarily raised by 5.0 percent on corporations with annual turnover of more than €250 million, he said.

"To reach zero deficit by 2016, which is our objective, we must save a little more than €100 billion," Fillon said.

"It is unthinkable to do this exclusively by raising taxes, as the opposition suggests. This would lead to the tripling of income taxes and the doubling of VAT."

The state will meanwhile cut its costs by an additional €500 million next year, for a total reduction of €1.5 billion against 2011, he said.

In a symbolic gesture, Fillon also announced that the salaries of Sarkozy and his ministers would be frozen and called on business leaders to do the same, saying pay rises for some corporate bosses were "frankly indecent."

Sarkozy spent the weekend huddled with top ministers and advisors to devise the plan amid rumours that France might be stripped of its triple-A rating.

Ratings agency Moody's warned last month that it may place a negative outlook on France within three months as the government's financial strength had "weakened" due to a slowing economy and increased eurozone commitments.

France is trying to reduce its budget deficit from 5.7 percent of Gross Domestic Product this year to 4.5 percent in 2012. It is hoping to reach the European Union limit of 3.0 percent in 2013.

Its overall public debt stands at about €1.7 trillion.

Sarkozy, elected in 2007, is facing a tough challenge on the left from Hollande, who is far ahead in public opinion polls.

France is to vote in a presidential election next April and, if as expected no candidate wins a first-round majority, a second round follows in May.