By Daniel Flynn
PARIS (Reuters) - French President Francois Hollande insisted on Friday he would press ahead with spending cuts and promised tax reforms next year, amid reports his Socialist government was watering down flagship measures such as a 75 percent tax on the rich.
Elected in May on a pledge to curb unemployment and tax the rich, Hollande said a stagnant economy made it crucial for France to stick to a target of cutting the deficit to 3 percent of gross domestic product (GDP) next year or else risk losing investors' trust.
Hollande said that by holding state spending steady in nominal terms next year -- excluding debt servicing and pension payments -- his government would save 10 billion euros in inflation-adjusted terms.
However, that would go just one-third of the way towards the more than 30 billion euros in savings which Hollande said are needed to hit next year's deficit target - the first milestone toward his goal of balancing France's budget by the end of his five-year mandate.
With the government refusing to cut staffing levels, the bulk of the adjustment will have to come from tax rises, economists warn.
"This will be the biggest effort in 30 years," Hollande said at a ceremony to swear in a new magistrate to the state auditor's office.
"Bold decisions are being taken on public spending. Audacious tax reforms will be proposed. Changes are planned in the organization and the activities of government."
France's deficit has not slipped beneath the EU threshold of 3 percent since 2007, before the global financial crisis, when it stood at 2.7 percent of GDP.
With the state debt having soared to 90 percent of GDP as a result of the crisis, Hollande said that servicing payments were now the second largest item in the budget, making the adjustment more complex.
The spending plan, due to go before the cabinet on September 26, is seen as a crucial test of Hollande's reformist mettle by markets and EU partners alike, but there is so far little sign of his government undertaking far-reaching reforms to the state next year.
France has not balanced its budget since 1974. Having risen steadily for the last 30 years, state spending is now 56 percent of economic output - second only to Denmark in the West.
NO DECISION ON 75 PCT TAX
As part of an overhaul of the budgetary process, Hollande said France would create a public finances watchdog to verify the budget's economic assumptions and feasibility.
Amid newspaper reports that the government was preparing to water down a pledge to tax at 75 percent those earning over 1 million euros a year, Labor Minister Michel Sapin insisted the measure would go ahead but some nuances would be introduced.
"This is a major proposal, it's a measure for justice, for social cohesion," Sapin told Canal+ television.
He said that, while for single people the threshold of the tax would be one million, it would be higher for couples.
Referring to reports in right-leaning Le Figaro that artists and sportsmen could be made exempt, Sapin said the tax would be based on average earnings over a long period so those receiving a temporary spike in their earnings would not be hit.
He did not comment on reports in right-leaning Le Figaro newspaper that the CSG and CRDS social charges would be included in the headline rate -- suggesting the effective rate of income tax would be around 67 percent.
"We have not finalized the proposal ... It will be decided next week: between the reality of next week and the suppositions of today there may be some difference," he said.
Finance Minister Pierre Moscovici last week told business leaders the government was seeking an "intelligent" way to implement the tax without driving away investors.
Le Figaro, without citing sources, also said the government would postpone plans to raise corporate tax on large firms to 35 percent from the current rate of 33 percent, while slashing it to 15 percent for small businesses. ($1 = 0.7915 euros)
(Additional reporting by Julien Ponthus and Leigh Thomas; editing by Catherine Bremer, Ron Askew)