French government on the defensive over election-year budget

By Myriam Rivet and Leigh Thomas

PARIS (Reuters) - The French government defended its deficit-cutting plans on Wednesday as it announced its 2017 budget, in the face of criticism that it is being overly optimistic heading into an election year.

With his economic record marred by his failure to bring down unemployment, President Francois Hollande is keen to show voters he has brought France's finances back from the post-war record deficits he found them in when he took office in 2012.

He also wants to rebuild France's fiscal credibility with its EU partners by bringing its deficit in line with EU rules, which Paris has broken for a decade.

His Socialist-led government aims to cut the deficit to a decade-low 2.7 percent of economic output next year from 3.3 percent this year, bringing it in line with an EU-imposed limit of 3 percent.

Finance Minister Michel Sapin said the budget targets would be met by making 5 billion euros ($5.6 billion) more in savings, helping offset nearly 7 billion euros in extra funds to be spent on education, security and job creation schemes next year. Income tax will be trimmed by 1 billion euros.

"It will be entirely financed. Don't expect us to stray from the principles that we've stuck to for four years on the pretext of a presidential election," Sapin told a news conference.

France's independent fiscal watchdog expressed doubt on Tuesday that the government would be able to cut the public deficit as much as planned, saying its growth forecasts were overly optimistic.

Sapin said the government had a track record of meeting its deficit targets, although it has had at times to revise those goals upwards in order to meet them.

"What was out of reach has been achieved," said Sapin, adding that the 2017 targets would be met if the next government didn't tear up his budget plans.

The main conservative candidates for April's presidential election all have programs that would cut taxes and drive up the deficit in hope that stronger growth in the future would bring in enough tax revenue to subsequently bring the budget shortfall down quickly.

Sapin acknowledged that the budget did not take into account the recapitalizations of state-controlled companies AREVA and EDF, which both are expected to carry out 5 billion euro capital increases.

A lower than expected state budget deficit, however, which excludes local government finances and social security spending, offered some breathing space.

Thanks to the smaller state budget deficit and lower bond redemptions, the public debt management agency trimmed its debt issuance outlook for 2017.

France has benefited from record low interest rates on its debt, the result of ECB bond buying, saving the state nearly 3 billion euros in debt-servicing costs this year.

(Editing by Richard Lough and Hugh Lawson)

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