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• President Francois Hollande now has task of explaining to voters that sweeping costs cuts will be inevitable - despite promising an end to austerity
• Government plans tax rises on the wealthy and on companies but unpopular welfare and civil service job cuts are likely next year
• Hollande's approval rating has slid by seven points to 51 per cent as the public fears more economic gloom

By Anthony Bond

PUBLISHED: 08:10 EST, 2 July 2012 | UPDATED: 10:22 EST, 2 July 2012

Worrying: A review of France's state finances - requested by President Francois Hollande - has revealed a massive 27billion shortfall in its economy, threatening the country's deficit goals

A review of France's state finances has revealed a massive 27billion shortfall in its economy, threatening its deficit goals.

After winning the presidential campaign in May, Francois Hollande requested a thorough review of the country's finances.

That review was completely today when the state auditor told the government the country will have to find 6-10 billion euros (4.8-8 billion) this year and a massive 33 billion (27bn) in 2013 to meet its European deficit targets - or risk unnerving financial markets.

While in line with economists' predictions, the figures leave Hollande with the tricky task of explaining to voters, seven weeks after he took office promising an end to austerity, that sweeping costs cuts will be inevitable after all.

The government plans tax rises on the wealthy and on companies to adjust the 2012 budget, but unpopular welfare and civil service job cuts are likely next year.

Hollande's approval rating has already slid by seven points to around 51 per cent as the public fears more economic gloom.

The government will revise down official growth forecasts as it uses the audit to rework the 2012 budget, Finance Minister Pierre Moscovici said in a newspaper interview.

The Court of Auditors-- a quasi-judicial body responsible for overseeing public accounts - said it had not uncovered any new skeletons left by the outgoing government of conservative former President Nicolas Sarkozy.

It pointed to 1.2 to 2.0 billion euros of likely overspending this year in areas like defence, agriculture and housing, but said this was normal.

The main obstacle to Hollande's pledge to honour France's European Union deficit targets of 4.5 per cent of GDP this year and 3.0 per cent in 2013, the court said, was a revenue shortfall due to over optimistic assumptions on economic growth.

The crunch year for public finances would come in 2013, the auditors said, when the government must make the biggest step in deficit reduction in the face of weak growth, a persistent euro zone crisis and rising domestic anger over high unemployment.

'Respecting the 2013 public finance target is particularly important for France's credibility with the euro zone gravely affected by a debt crisis,' the report said.

Even if Paris meets this year's target, public debt is on course to top the 90 per cent of GDP level at which economists see a negative impact on growth, making it vital that the government act quickly.

Bad news: The government plans tax rises on the wealthy and on companies to adjust the 2012 budget, but unpopular welfare and civil service job cuts are likely next year. The Eiffel Tower is pictured in Paris

Grim: The president of the French Court of Auditors, Didier Migaud, poses with the court's report on the country's finances

'If the dynamic of public debt does not slow, the risk premium demanded by investors will raise debt servicing costs and limit still further the room for manoeuvre,' it said.

Government sources have already said that a revised 2012 budget, due before the cabinet on Wednesday, will include some 7.5 billion euros in new taxes, including increases in wealth tax and a financial transactions tax.

But the auditor's report will strengthen the case for tough spending and tax measures in the 2013 budget, due in the autumn, potentially helping the government face down opposition from powerful trade unions and its own far-left political allies.

The Court of Auditors said growth this year would be around 0.4 per cent, less than the 0.7 per cent assumption in the old budget.

For 2013, the auditors assumed growth of 1 per cent, well shy of the previous government's 1.75 per cent forecast.

The new government appeared to agree. Moscovici told Le Figaro he would base a 2012 corrective budget on a growth forecast of 0.4 per cent or less, and the 2013 plan on output expansion of 1.0 to 1.3 per cent.

Despite France's success in cutting the deficit last year, to 5.2 per cent of GDP from 7.1 per cent in 2010, its finances remain worse than the euro zone average of a 3.8 per cent deficit.

While neighbouring Germany was starting to reduce its debt, France's was still climbing, draining the competitiveness of its economy, the court said. 

France urgently needed to rein in one of the highest state spending levels in Europe, at 56 per cent of GDP.

'Budgetary adjustments should be aimed mainly at spending,' the report said, noting that efficiency gains would allow this to be done without affecting the quality of services.

It said job cuts were indispensable to curb mounting payroll costs.

The Court of Auditors is headed by Didier Migaud, a former Socialist politician appointed by Sarkozy, giving its recommendations bipartisan authority. 

In the short term, the auditors accepted that tax rises were needed to avoid drastic spending cuts which would choke off a recovery.

They recommended reductions to tax exemptions and a short-term increase in Value-Added Tax and the CSG welfare charge.

The court report did not take into account measures approved by the government since it took office in May, including a two percent rise in the minimum wage.

Change: The state auditors said it had not uncovered any new skeletons left by the outgoing government of conservative former President Nicolas Sarkozy. He is pictured with his wife Carla Bruni leaving the Elysee Palace after Francois Hollande was sworn in as President

Its figures also did not include a recent EU decision on taxation of foreign investment funds, which could cost France up to 9 billion euros, nor the extra cost of France's share in a 100 billion euro zone bailout for Spanish banks, agreed last month.

If the 33 billion euros next year were split evenly between spending reductions and new taxes, the government could find the 16.5 billion euros of expenditure savings by slowing state spending increases to the pace of inflation, the auditors said.

Prime Minister Jean-Marc Ayrault, due to set out his legislative agenda to parliament on Tuesday, has said the central government - which accounts for four-fifths of the deficit - would hold spending flat between 2013 and 2015.