France targets 2027 to tame ballooning deficit after COVID - sources

PARIS, April 8 (Reuters) - France plans to bring its public budget deficit back in line with an EU limit from 2027 and is prepared to write a firm spending cap into law to keep its deficit-reduction commitment on track, Finance Ministry sources said on Thursday.

During the coronavirus crisis, the European Union has suspended the rules requiring member states to keep their public deficits to less than 3% of gross domestic product.

France, which broke the limit for a decade until 2017, aims to gradually cut its deficit and only return to the 3% limit long after the crisis is expected to subside, according to annual long-term public finance plans the government will send to the European Commission this month.

Paris now plans to cut its public sector budget deficit to 2.8% of GDP by 2027 from a post-war record of 9.2% last year, a first Finance Ministry source said.

With France struggling to rein in a third coronavirus wave with new lockdown measures, the government expects an extra 55 billion euros ($65 billion) in crisis spending this year, including additional support for the health system, a second ministry source said.

This year the ministry expects only a marginal improvement, projecting the deficit will fall to 9.0%.

"We refuse austerity, we refuse to put the return of economic growth at risk by restoring the public finances too brutally," the first Finance Ministry source said.

While ruling out a tax increase over the next five years, the ministry said annual spending growth would have to be limited to 0.7% after inflation -- the lowest in two decades -- to meet the new deficit reduction target.

To stay on that path, the ministry wants a cap on spending growth to be written for the first time into a new multi-year budget planning law, the first source said.

Finance Minister Bruno Le Maire is even in favour of tweaking the constitution to include such a spending cap, the source said, although that is unlikely to be possible until after a presidential election next year.

DEBT BURDEN

In addition to limiting spending growth, once the crisis is over France will need to carry out structural reforms such as a retirement system overhaul that was put on ice when the outbreak began last year, the first source said.

While the EU public finance rules have been suspended, some member governments such as France are pushing to revise them once the crisis has waned.

The first Finance Ministry source said the most important rule to revise would be limits on debt as countries would be emerging from the crisis with widely diverging debt burdens.

In France's case, the Finance Ministry expects the national debt to edge up from 117.8% of GDP this year to peak at 118.3% in 2025 before it begins to fall.

France's long-term budget plans are built on estimates that the euro zone's second biggest economy can rebound 5.0% this year after contracting 8.2% last year.

Next year the economy was seen growing 4.0% with the rate gradually slowing to 1.4% annually from 2025, according to the ministry's projections. ($1 = 0.8430 euros)

(Reporting by Leigh Thomas; Editing by Alison Williams)