France must focus on cutting government spending, not raising taxes, to reduce budget deficit, says ECB official following S&P's warning of a ratings cut; country's costly welfare and pension systems, labor market among reform targets

PARIS , May 28, 2013 () – France must turn the focus of its budget consolidation efforts to reining in public spending as there is no room to raise taxes further, ECB governing council member Christian Noyer urged on Tuesday.

The Bank of France governor added his voice to a growing chorus calling on the Socialist government to tackle spending seriously after ratings agency Standard & Poor's warned of a ratings cut if budget savings are not delivered.

Noyer said spending cuts would have to include sensitive areas such as France's generous but costly welfare system and also said more pension and labour market reforms were needed than those already planned by the government.

In the introduction to the Bank of France's annual report, Noyer said investor confidence in France hinged on whether the government lives up to a commitment to bring the structural deficit, which excludes swings in the business cycle, into balance in 2016.

"The government now needs to concentrate on public spending to meet its target, as the tax burden has reached a very high level and any further increases in employer contributions would lead to a deterioration in both activity and employment," wrote Noyer in the letter.

President Francois Hollande's government hiked taxes when it came to office a year ago and has said it will increasingly focus on reining in spending.

It is facing growing pressure to spell out where the cuts will be made with Standard & Poor's telling Reuters on Monday that the ratings agency expected the 2014 budget to contain extra measures for trimming the deficit.

The government is struggling to find the right pace of belt-tightening so that it does not weigh too much on the euro zone's second-biggest economy, which entered a recession in the first quarter.

Tax hikes and government spending restraint are already sapping on household morale, with a monthly indicator of consumer confidence plunging in May to a record low, according to the INSEE national statistics office.

At 30 percent of GDP, Noyer said welfare spending was currently unsustainable and that the best way to deal with it would also be by tackling spending, rather than further raising contributions to the system.

Turning to the pension system, he said that making people work longer was inevitable. That is something President Francois Hollande has acknowledged, although the government has ruled out raising the statutory retirement age in the pension reform.

While welcoming a reform of the labour market earlier this year, Noyer also said that further efforts were needed.

(Reporting by Leigh Thomas; Editing by Mark John)

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