By Leigh Thomas
PARIS (Reuters) - France is on course to overshoot the European Union's budget deficit ceiling next year without new spending cuts after President Emmanuel Macron caved in to anti-government street protests.
Macron announced wage increases for the poorest workers and a tax cut for most pensioners on Monday to defuse discontent, leaving his government scrambling to come up with extra budget savings or risk blowing through the EU's 3 percent of GDP limit.
Prime Minister Edouard Philippe was due on Tuesday to address parliament to detail how the measures will be financed in a redraft of the budget weeks before it takes effect.
"Under all likelihood, the 2019 public deficit will print above the 3.0 percent benchmark," Societe Generale economist Michel Martinez wrote in a research note.
However, the deficit was unlikely to hit 3.5 percent, as some French media suggested, because the government would look to offset the extra strain on the budget, he said.
Any failure to respect the EU deficit ceiling could shatter France's fiscal credibility with its European partners after flouting it for a decade before Macron took office.
Equally, any sign of leniency could at the same time complicate the Commission's already tense discussions with Rome about keeping its deficit down.
"There is a very strong interest to put Italy and France in the same pot," one EU official told Reuters.
"In Italy they themselves are planning this very blunt breach. The situation in France serves their purpose, they will say they are preventing social unrest like in France and they will say: what about equal treatment?"
(Graphic: French public deficit - https://tmsnrt.rs/2SE2eor)
His concessions to protesters have put pressure on French bond yields with the spread over German yields spiking up to the highest level since May 2017.
The measures announced by Macron on Monday would put a 8-10 billion euro ($9.1-11.4 billion) hole in the budget, ministers said, on top of the 4 billion euros lost after Macron scrapped hikes to fuel taxes in a first wave of concessions last week.
"We are going to make savings, just as we have said we would, starting with savings in government and that's for us to make happen," government spokesman Benjamin Griveaux.
In its original 2019 budget, the government targetted a public deficit of 2.8 percent of GDP. That, though, was based on a growth estimate of 1.7 percent, which now looks increasingly optimistic as the economy slows in the face of the protests.
However, the 2019 deficit would have been only 1.9 percent without the long-planned one-off impact of a payroll tax rebate scheme becoming a permanent tax cut at a cost of 20 billion euros (17.88 billion pounds).
Asked whether the budget deficit would be kept below the EU limit, an Elysee official said on Monday France had some wiggle room on spending if the tax rebate was not taken into account.
Nonetheless, France faces tougher scrutiny from the European Commission, which is likely to demand firm commitments to reforms for any leeway.
(Reporting by Leigh Thomas and Simon Carraud, additional reporting by Jean-Baptiste Vey; editing by Richard Lough, Richard Balmforth)