French defence build-up must not push finances off course, minister says

PARIS (Reuters) - French government plans to increase defence spending must be designed in a way that does not push strained public finances off course, Finance Minister Eric Lombard said on Wednesday.

In the face of threats from Russia and the prospect of a reduced U.S. security role in Europe, President Emmanuel Macron said this month that European countries should increase defence spending to 3-3.5% of economic output.

With French defence spending now at 2%, that would imply an increase of at least 30 billion euros ($32.75 billion) annually, a considerable sum to raise against a difficult financial backdrop.

"Given our current budget situation, these new funds can only be put in place from within our deficit reduction plans," Lombard told senators.

The government plans to reduce the public sector budget deficit from 5.4% of economic output this year - one of the biggest fiscal shortfalls in the European Union - to the bloc's 3% ceiling in 2029.

Lombard said that work was underway to boost defence spending in a way that neither adds to France's debt burden nor undermines the country's cherished but costly welfare system.

The government is due to outline plans on March 20 to funnel more private savings towards the defence sector through existing investment vehicles, many of which benefit from tax incentives.

Some lawmakers have called for a new class of tax-free savings accounts to be created so deposits could be lent to defence firms, using as a model popular for accounts that fund social housing.

Lombard said he preferred using existing investment vehicles and the French banking federation said that a new class of savings account would do little to help undercapitalised defence firms.

($1 = 0.9161 euros)

(Reporting by Leigh Thomas; editing by Philippa Fletcher)