By Leigh Thomas
PARIS (Reuters) - France will miss its deficit targets as growth in the euro zone's second-biggest economy fails to live up to the government's hopes, the International Monetary Fund said on Thursday.
In its annual report on the French economy, the IMF also saw a real threat that voter resistance to spending restraints could jeopardise France's long-term strategy for restoring the public accounts to health.
It estimated the public sector deficit will come to 4.0 percent of economic output this year, more than the 3.8 percent targeted by President Francois Hollande's Socialist government.
As a result, France will fail to bring its deficit in line with an EU-agreed limit of 3 percent next year, the IMF estimated, forecasting instead a budget gap of 3.4 percent.
France has already received two extra years to reach the limit and risks a credibility-damaging showdown with EU partners like Germany if it is forced to seek yet more time.
The government has based its plan to meet the deficit targets on expectations the economy will grow 1.0 percent this year and 1.7 percent next year, which the IMF estimated to be too optimistic.
Cutting its growth forecasts, the IMF predicted the economy would grow only 0.7 percent this year and 1.4 percent next year.
Finance Minister Michel Sapin said earlier on Thursday the government was standing by its forecast at least until second quarter growth figures are published in mid-August. He also said the 2015 budget would target a public deficit of 3 percent of GDP as agreed with EU partners.
The IMF was less optimistic than the government about how soon the growth would get a kick from plans to phase out over three years a 30 billion euro (23.82 billion pounds) cut in payroll tax paid by companies.
It said the biggest home-grown risk to the economy was that a recovery in investment fails to materialise. The government is banking precisely on that to drive a rebound.
Though welcoming government plans to rein in spending by 50 billion euros over three years, the IMF warned that resistance to belt-tightening would build as specific measures come up for discussion.
The government's support from its own Socialist party is already fraying over its plans to cut spending growth. Last month, France saw its longest rail strike in years as unions challenged relatively modest reform plans for the sector.
Yet there was no room for the government to stray from its planned path to fiscal rectitude on account of tax cuts for business and people on low incomes, the IMF said.
"The major risks are that the initial plans may be diluted in sequential annual budgets and that cuts in transfers to local governments may be compensated by unsustainable cuts in investment, higher taxes or higher debt," said Edward Gardner, the IMF's mission head to France.
"This would undermine the government's fiscal rebalancing strategy," he said in a statement.
(Reporting by Leigh Thomas; Editing by Catherine Evans)