The German cabinet has approved a tough, revised budget aimed at meeting the demands of the Stability and Growth Pact.

But France - the other large EU state in danger of breaching the pact - raised its deficit forecast for 2002 to 2.8 per cent of Gross Domestic Product (GDP).

The French move came just a day after the European Commission warned Paris that it was in danger of breaching the Pact's 3 per cent ceiling on budget deficits.

The German government, which faces EU disciplinary procedures for running an excessive deficit, has agreed to cut spending in some areas and increase taxes in order to stay within the 3 per cent limit in 2003.

The finance minister, Mr Hans Eichel, expressed confidence yesterday that the measures would succeed.

"If it is all implemented, then we will be below the three percent level next year, although it will not be an easy path," he said.

Mr Eichel reaffirmed Germany's commitment to achieving a balanced budget by 2006, one of the terms of the Stability and Growth Pact and he insisted that his government's forecast for 2003 growth of 1.5 per cent was realistic.

The measures, which include the introduction of a 15 per cent capital gains tax, will be introduced in parliament next month and are expected to be passed next March.

But some of the proposals are unpopular and Mr Gerhard Schroeder's centre-left government does not enjoy a majority in Germany's upper house, the Bundesrat.

The French budget minister, Mr Alain Lambert, said that his government was holding firm to its forecast of a 2.6 per cent deficit in 2003 even though the 2002 deficit forecast had been raised to 2.8 per cent.

"We will do what is needed in 2003 so that there is no deterioration in the deficit voted by the National Assembly," he said.

A French government spokesman said that the cabinet did not discuss the Commission's call on Tuesday for an "early warning" against France.

"No, the issue was not discussed as such, but the budget minister restated France's determination to respect European commitments and watch very closely to ensure the deficit stays below three percent next year," he said.

But the finance minister, Mr Francis Mer, promised later that France would bring its deficit down again in 2003 even if it missed its ambitious 2.5 per cent growth target for next year.

"The Commission is right to warn us. But we shall show the Commission their fears are unjustified. I am comfortable with the 2.5 per cent growth target for 2003, but even if it was only two per cent, our cost management would allow us to reach our target of 2.6 per cent," he said.