Responding to President Francois Hollande's request for a thorough review of state finances, the Court of Auditors - a quasi-judicial body responsible for overseeing public accounts - said a revenue shortfall was threatening deficit goals.

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 percent 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 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 defense, agriculture and housing, but said this was normal.

The main obstacle to Hollande's pledge to honor France's European Union deficit targets of 4.5 percent of GDP this year and 3.0 percent 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 percent of GDP level at which economists see a negative impact on growth, making it vital that the government act quickly.

"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 maneuver," 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.

SPENDING CUTS ESSENTIAL

The Court of Auditors said growth this year would be around 0.4 percent, less than the 0.7 percent assumption in the old budget. For 2013, the auditors assumed growth of 1 percent, well shy of the previous government's 1.75 percent 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 percent or less, and the 2013 plan on output expansion of 1.0 to 1.3 percent.

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

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.

($1 = 0.7880 euros)

(Editing by Paul Taylor)

• A Permanent Economic Emergency