The shape of the French deficit cutting package to be announced today could prove crucial for the future direction of the pound. The package will follow the release of an audit of state finances that will show, without corrective action, France's 1997 deficit will significantly overshoot Maastricht treaty guidelines for qualifying for the European Union's single currency due to be launched in 1999.
The pound has been trading as much as 13 per cent above the franc in recent weeks and analysts fear that a negative reaction to the package could put further downward pressure on the French currency.
That could put further pressure on the pound at the top of the grid and hasten the decision to either re-value of start intervening in the currency markets.
Prime Minister Lionel Jospin put final touches at the weekend on the measures to cut the deficit and bring it to within hailing distance of the treaty target of per cent of gross domestic product.
The 1997 deficit is said to be running at between 3.5 and 3.7 per cent. That is well above the previous conservative government's 3 per cent objective set in line with a strict reading of the Maastricht treaty and the goal to which Germany has vowed to stick despite its own financial troubles. Under the cuts, the corporate sector, not ordinary taxpayers, are expected to bear the load. Big companies, whose profits are at record highs, are likely to be slapped by a "euro surcharge" to raise 12 billion francs (£1.32 billion) sources say.
The government would extend into 1998 an `'exceptional increase" in corporate tax to 40 per cent of profits from the 36.6 per cent. The companies could also be hit by a rise in the current 19 per cent tax on capital gains on sales of assets.
But small and medium firms, seen as key to job creation in the battle to cut 12.5 per cent unemployment, would be spared.
The government is also mulling a rise in employers' pension contributions, and could tap state bank Caisse des Depots et Consignations for 10 billion to 15 billion francs to fill budget gaps, the newspaper Journal de Dimanche said yesterday.
But the paper said the government had abandoned reversing tax cuts on wealthy citizens implemented by the conservatives.
Weak revenues stemming from a sluggish economy have pushed France's deficit-cutting drive off couse. A handover note from former prime minister Alain Juppe to Mr Jospin warned there was a 35 billion franc shortfall in 1997 revenues and that without tough action, the deficit could rise above four percent in 1998.
The government has already said it will not make the "3.0" percent interpretation this year but will curb the deficit.
The Socialists, who scored a surprise parliamentary election win on June 1st, affirmed their commitment during the campaign to France joining the single currency when it starts in 1999, but promised no further belt-tightening to qualify.
They are expected to say that their decision to spare ordinary taxpayers from the deficit cuts honours that pledge.
The Socialists have argued for a "flexible" reading of the treaty based on progress toward 3 per cent, saying austerity is stifling economic growth.
Economists did not expect the government to announce a specific deficit goal for 1997 on Monday. "By remaining less clear, they can re-evaluate the situation in the autumn," said Michala Marcussen of Societe Generale.
The government is believed to be aiming to get the deficit to 3.3 per cent of GDP this year and 3 per cent next year. Every 0.1 per cent of overshoot is calculated to represent around eight billion francs in revenue shortfall.
