By Daniel Flynn
PARIS (Reuters) - The International Monetary Fund warned France on Wednesday it would miss its 3 percent deficit target for 2013 unless it took further steps to cut medium-term spending, which were needed to safeguard its AAA credit rating.
With France gearing up for presidential elections in April, the Fund backed President Nicolas Sarkozy's proposal to write balancing the budget into the constitution -- a move bitterly opposed by the opposition Socialist Party.
Sarkozy has staked his reputation on cutting France's deficit from 7.1 percent of GDP last year to the limit of 3 percent under the euro zone's Stability and Growth Pact by 2013.
Budget Minister Valerie Pecresse said on Wednesday that pledge was "sacrosanct".
In its annual review of France's economy, the Fund said it expected growth and tax revenues to miss government projections. It forecast France's deficit would decline from 5.7 percent of GDP this year to 4.8 percent by 2012 but not fall below 3.8 percent by the end of 2013.
"Under staff's current projections, achieving the deficit target of 3 percent of GDP by 2013 requires further measures," the report said.
With tax rates already amongst the highest in Europe, France's only option was for the government to reduce its spending to meet its fiscal targets, the IMF said, particularly in areas such as pensions and healthcare.
The Fund said a reduction in the deficit of 0.2 percent of GDP was needed in 2012 and 0.6 percent in 2013.
Pecresse said that, if needed, the government stood ready to make further reductions in tax exemptions to meet its fiscal targets.
"The deficit reduction target is sacrosanct. France has to have a deficit of 3 percent in 2013," she said.
FRANCE CANNOT RISK MISSING TARGETS
With concern over contagion sending shock-waves through the euro zone, President Nicolas Sarkozy played a decisive role in securing a deal last week on a second Greek bailout.
But economists say France's top-notch credit rating remains under scrutiny.
France has the highest deficit, debt and primary deficit -- which excludes interest payments -- among the AAA-rated euro zone countries.
"France cannot risk missing its medium-term fiscal targets given the need to strengthen implementation of the Stability and Growth Pact (SGP) and keep borrowing costs low by securing France's AAA rating," the IMF staff report said.
Under its baseline scenario, the IMF said France's debt would peak at 88 percent of GDP in 2013, but it warned that it could climb as high as 95 percent of GDP if interest rates were higher than expected and economic growth slower.
The government forecasts that debt will peak at 86.9 percent of GDP in 2012.
The Fund said the constitutional reform being debated by parliament would "help to unequivocally signal the authorities' commitment to the adjustment path".
It also called for France to instigate a multi-year budget plan based on independent economic forecasts and urged deeper reform of the pensions and healthcare system to secure long-term fiscal sustainability.
The IMF said France's economy, the second largest in the euro zone, was on track to grow 2.1 percent in 2011, roughly in line with the government's forecast of 2.0 percent.
It said growth would slow to 1.9 percent of GDP in 2012 before picking up to 2.0 percent in 2013. The Fund urged the government to reduce hefty taxes on labor to improve competitiveness.
It noted that French banks' profitability was now back above pre-crisis levels and the sector was gaining strength, and risks from a boom in house prices and the euro zone debt crisis were contained.
(Additional reporting by Leigh Thomas and John Irish; Editing by Leigh Thomas and John Stonestreet)