(This Sept. 25 story has been corrected to say 'three-quarters,' not 'two-thirds,' in paragraph 13)
By Leigh Thomas
PARIS (Reuters) - France's new finance and budget ministers said on Wednesday they would focus a budget squeeze on spending cuts first and then tax increases, as the new government faces calls to come up with realistic plans to rein in a spiralling fiscal shortfall.
Prime Minister Michel Barnier needs to finalise a 2025 budget in days and hand it over to lawmakers by mid-October at the very latest.
But new Finance Minister Antoine Armand and Budget Minister Laurent Saint-Martin must first find billions of euros in spending cuts and tax increases to close a bigger than expected deficit.
Striking the right balance will be difficult. The government lacks a parliamentary majority, and left-wing and far-right lawmakers hold the balance of power.
"The burden will need to be shared. It must firstly come from making an effort on public spending," Armand told lawmakers in a first appearance before parliament's finance committee since being appointed at the weekend. "Everyone will have to take part."
Saint-Martin said the hole in public finances was worse than expected only a few days ago, with the budget deficit at risk of topping 6% of economic output, far above the 5.1% the previous government had estimated in the spring.
Armand, a 33-year-old freshman lawmaker until his appointment, said that although economic growth was marginally better than expected at 1.1%, it was not enough to ease the pressure on public finances.
Both ministers gave no further details about the 2025 budget and how fast they aim to cut the deficit, other than saying it would be handed to lawmakers in the week of Oct. 9.
The previous government had planned to cut the fiscal shortfall to 3% of GDP by 2027, but weak tax revenues and budget overruns have put that target all but out of reach.
"Three years is not realistic, not economically or with regards to growth. But to do it in five years is possible," Bank of France Governor Francois Villeroy de Galhau told France 2 TV, urging action to reduce the deficit.
CREDIBILITY ON THE LINE
France's credibility with financial markets, where its borrowing costs have surged, and its European Union partners is also on the line, with Paris already facing an excessive deficit procedure from the EU executive, the European Commission.
Barnier has suggested he would be open to raising taxes on the wealthy and some corporations, a position Armand and Saint-Martin echoed in parliament. The head of state-owned nuclear power company EDF said on Wednesday a mooted tax hike on power production would hit its investments just as it is preparing plans for a series of costly new reactors.
Villeroy said spending cuts should make up three-quarters of the effort to rein in the deficit with the rest coming from targeted tax hikes.
In rare good news for the new government, consumer confidence improved for the third straight month in September, topping analysts' expectations, official INSEE data showed.
An increase in the proportion of households feeling that the present is a good time to make big purchases, as well as easing concern about unemployment, helped drive the index up to its highest level since February 2022.
While consumer confidence has improved, investors remain concerned about the new government's ability to tackle the deficit, pushing France's borrowing costs briefly above Spain's on Tuesday for the first time since 2008.
"France's international lenders are telling us we need to react," Villeroy said.
(Reporting by Makini Brice and Leigh Thomas, additional reporting by Michal Aleksandrowicz; Editing by Sudip Kar-Gupta, Christina Fincher and Toby Chopra)