Sept. 30 (Bloomberg) -- French President Nicolas Sarkozy says even with a record budget deficit, France needs to spend more borrowed money to kick start economic growth.

As the government prepares to unveil its latest tax and spending plans today, Sarkozy is promising a “grand loan” to finance spending on everything from Paris’s rail system to new supercomputers. That will swell a budget shortfall that already is the highest since 1959, the year after France’s post-war government collapsed and Charles de Gaulle took power.

Sarkozy’s borrowing proposal puts him at odds with German Chancellor Angela Merkel and British Prime Minister Gordon Brown, who say they intend to rein in deficits swollen by the recession. The risk is that Sarkozy’s penchant for “investing” may spook bond investors even as they improve earnings prospects for companies such as Bouygues SA and Electricite de France SA. It may even undermine France’s top credit rating.

“France is in a dreadful debt dynamic,” said Guillaume Sciard, who oversees 3 billion euros ($4.4 billion) of bonds at Barclays Wealth Managers France in Paris. “France will lose its AAA rating by 2012. In Europe, Germany may be the last to potentially keep its AAA.”

Budget Minister Eric Woerth will set out the 2010 budget at 1 p.m. today in Paris. Prime Minister Francois Fillonsaid yesterday that the 2009 deficit will be at least 140 billion euros before falling to 115 billion euros next year. Including social-security payments, the deficit will be about 8.2 percent of gross domestic product in both years, he said.

“What’s worrying is the deficit is widening even without the Sarkozy plan,” said Laurence Boone, an economist at Barclays Capital in Paris.

Carbon Tax

Sarkozy has pledged not to raise social charges and to scrap a local business tax, trimming about 12 billion euros from government revenue. To offset that, he plans to enact a carbon tax that will raise about 2 billion euros.

Thirty-five years of uninterrupted deficits have driven France’s gross debt to 1.4 trillion euros, equivalent to about 86 percent of GDP, according to Bloomberg data.

While Sarkozy has left the loan’s size and its exact use open, he has suggested it may be used to meet energy needs or to expand Paris’s transport infrastructure, helping the city to grow beyond its current borders. These investments may benefit builders such as Bouygues, Vinci SA and Eiffage SA, or utilities such as EDF and Veolia Environnement SA. All the companies are based in or near Paris.

Nuclear Arsenal

Other possible uses include industrial development, such as Bull SA’s supercomputer near Orly airport south of Paris, which was built with government support to service France’s nuclear arsenal and also has private industrial uses.

France has a record completing massive public projects, notably the construction of its nuclear-power stations in the 1970s and its high-speed rail network in the 1980s and 1990s. Some have not worked out so well, such as the supersonic Concorde, developed jointly with the U.K., which flew commercially for just 27 years.

To be sure, other countries also are struggling with deficits, while the Bank of England and the U.S. Federal Reserve are also financing budget shortfalls by buying government bonds.

Standard & Poor’s Rating Services on July 30 affirmed its AAA long-term and A-1+ short-term sovereign credit ratings for France, saying the outlook was stable.

“The stable outlook reflects our expectations that the French economy will return to positive growth once the global economy recovers and that this will be accompanied by a clearly discernable trend in budgetary consolidation and debt reduction,” S&P said.

‘National Interest’

With that vote of confidence, Sarkozy may be overreaching, some lawmakers say.

This plan “will add to debt and the state is already borrowing 700 million euros a day, so whatever we do it has to be in the national interest,” said Senator Jean Arthuis, a former finance minister.

Jean-Christoph Caffet, an economist at Natixis in Paris, expects the loan to be between 20 billion euros and 50 billion euros. Former Prime Minister Alain Juppe, who is co-heading a study committee on Sarkozy’s plan, said on Sept. 16 that 100 billion euros probably represents a ceiling.

Adding 50 billion euros to its current borrowings would bring gross French debt to about 89 percent of GDP, surpassing Hungary. France would become the European Union’s fourth-largest debtor behind Italy, Greece and Belgium.

Germany, Britain and Spain would all have smaller borrowings relative to the size of their economies, with gross debt burdens of 73 percent, 68 percent and 51 percent, according to European Commission estimates published in May.

“Sarkozy doesn’t want to increase taxes or social charges, so that leaves one single way to rein in the deficit: severely cut spending,” Caffet said. “That’s usually very tough to do. Sweden did it in the 1990s, but the French are not Swedes.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; Francois de Beaupuy in Paris at fbeaupuy@bloomberg.net

Last Updated: September 29, 2009 18:00 EDT