By Daniel Flynn and Leigh Thomas
PARIS (Reuters) - President Francois Hollande puts his fiscal credibility on the line on Friday when he delivers France's toughest budget in 30 years in the face of a stagnant economy, record unemployment and plunging opinion poll ratings.
The Socialist leader's first full budget, to be presented to the cabinet at mid-morning, must secure 30 billion euros (24 billion pounds) in savings to keep promises on cutting the deficit made as part of euro zone efforts to end the debt crisis.
The belt-tightening, via tax rises for high earners and a freeze on spending, aims to cut the 2013 public deficit to 3 percent of annual economic output and bolster France's place as a euro zone power with Germany despite its record debt levels.
"We need to get France back on the rails," Finance Minister Pierre Moscovici told Europe 1 radio, stressing that low and middle-income households would be largely shielded from tax rises that would hit only around one taxpayer in 10.
"This budget is about struggle, about reconstruction," Prime Minister Jean-Marc Ayrault said late on Thursday, warning that France's bond yields - currently at record lows around 2 percent - would jump if it did not meet its 2013 deficit target.
Economists, however, are concerned that the budget goals look ambitious, especially based on a 2013 economic growth forecast of 0.8 percent that is widely seen as over-optimistic.
Moscovici said that if Europe's economic crisis steadied, French growth could exceed 0.8 percent next year.
But data on Friday confirmed zero growth was posted in the second quarter, marking nine months of stagnation, as a pickup in business investment and government spending was offset by a worsening trade balance and sluggish consumer expenditure.
Despite a rise in wages, consumers - traditionally the motor of France's growth - increased their savings to 16.4 percent of income from 16.0 percent a year earlier, amid concern about unemployment which is at a 10-year high and rising.
In another setback for Hollande's finance team, other data showed the public debt rose to 91 percent of GDP in the second quarter, the highest level in post-war France, and consumer spending dropped 0.8 percent in August.
"Altogether the data paint the picture of a stagnating economy," said BNP economist Dominique Barbet.
GROWTH, CREDIT RATING AT RISK
Friday's budget bill is expected to lay out 10 billion euros in expected new revenues from extra taxes on mainly well-off households and another 10 billion from either corporate tax rises or cuts to existing tax breaks.
Fulfilling a campaign promise, the budget is expected to slap an upper tax rate of 75 percent on income above 1 million euros, and a new rate of 45 percent above 150,000 euros. These measures will raise a relatively modest half a billion euros but they have prompted predictions of a flight of business talent from France.
A further 10 billion will come from keeping a lid on central government spending, continuing a policy of replacing only one in two retiring civil servants and postponing spending. Calls from some economists for broader cuts will be ignored.
Hollande's promise to cut the deficit to 3 percent of gross domestic product from 4.5 percent this year is a step towards his promise to balance the budget in 2017.
BNP Paribas economist Helene Baudchon said the deficit was likely to come in above 3.0 percent due to the weak growth outlook. "As things stand, achieving a deficit of 3.3 percent would in itself be a remarkable outcome," she said.
Any sign of wavering could not only prompt financial markets to rethink their attitude towards France, in terms of low bond yields, but also trigger further downgrades after Standard & Poor's stripped France of its triple-A rating this year.
At the same time, the state belt-tightening risks putting further pressure on an economy which has stagnated over the last three quarters to teeter on the brink of recession, while the unemployment rate has risen to a 13-year high above 10 percent.
Below-target growth could mean Hollande - whose approval ratings have slid as low as 43 percent since his May election - may have to seek more painful savings to meet his deficit goals.
"It's a big risk, because it's possible that, as they try to reduce government spending and return to a balanced budget, they have a negative impact on growth," said Christopher Bickerton, an associate professor at Paris' Sciences Po university.
(Additional reporting by Catherine Bremer and Brian Love; editing by Mark John and David Stamp)
