By Elizabeth Pineau and Leigh Thomas
PARIS (Reuters) - President Francois Hollande's government on Monday announced cuts in tax breaks for rich households as part of a plan to reduce the huge cost of France's generous family benefits system.
The changes will stop short of cutting allowances outright for high-earning families, as some officials had wanted.
Instead, the bulk of the savings will come from reducing the income tax exemptions that wealthy parents can claim according to the number of the children they have.
The Socialist government aims to save 2 billion euros ($2.59 billion) annually from 2016 with belt-tightening measures, though some new spending means the net savings will be 1.7 billion euros.
That will not go a long way towards reducing the overall budget deficit but the move sends a signal to France's European Union partners that it is prepared to make politically sensitive reforms, having been given two extra years to meet a budget deficit goal of 3 percent of output.
"It is perfectly possible to reduce our deficit while preserving the core of our social model," Prime Minister Jean-Marc Ayrault told reporters as he presented the plan.
Conservatives, who view the cuts as another attack on France's traditional family model, may fight it as they did a gay marriage law passed last month. They had opposed the idea of making basic family allowances dependent on household income.
Hollande has already come under fire from business leaders and conservatives by trying to impose a 75-percent tax on earnings over one million euros per year, a plan significantly watered down after censure by a Constitutional Court.
Elected on promises to restore the struggling economy to health, Hollande has gone beyond his left-wing mandate to push through a labor market reform to loosen hiring and firing rules and has promised to overhaul the pension system by 2014.
However, it was his same-sex marriage law which caused the biggest protests as conservatives and far-right groups held sometimes violent demonstrations.
Conservative lawmaker Gilles Carrez, who heads the lower house finance committee, said the family benefits reform amounted to nothing less than a one-billion-euro tax hike spread over a million households.
"It's yet another hard blow for families, but we already knew that the Socialists don't like families," he said.
PINCH ON HOUSEHOLDS
The head of the body that pays out family benefits voiced some relief that the government had decided not to axe the right of all families with more than two children to receive a basic allowance no matter how much income they have.
"The principle of universality has been spared, but (this) will nevertheless be painful for families," said Jean-Louis Deroussen, president of the Caisse d'Allocations Familiales.
People on both the left and right take pride in a generous family welfare system credited with producing one of the highest birth rates in Europe and giving France an economic advantage over countries like Germany where women have fewer children.
However, the system imposes a hefty cost on public finances.
It ran a deficit of about 2.5 billion euros in 2012 and the government sees the shortfall growing if nothing is done.
The state hopes to save 1 billion euros a year from 2014 by lowering the ceiling on income tax exemptions parents can claim per child to 1,500 euros from 2,000 today. Some 1.3 million households will pay now 64 euros extra a month on average.
A raft of other measures is expected to yield further savings of one billion euros annually from 2016, adding up to the two billion total with the new limit on tax breaks.
An increase in household taxes risks weighing on consumer confidence at a time when it is already at a record low in the face of government austerity and surging unemployment.
($1 = 0.7716 euros)
(Writing by Leigh Thomas; Editing by Catherine Bremer)
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