* Sarkozy rules out tax hikes that would “delay recovery”

* Announces new borrowing to fund investment

* Ceremonial address aims to relaunch reform momentum

(Adds reaction from opposition, employers, paragraph 11)

By James Mackenzie

PARIS, June 22 (Reuters) - French President Nicolas Sarkozy ruled out tax rises and austerity measures to fight the economic crisis and said he would borrow more to finance investment despite a ballooning budget deficit.

“I will not conduct an austerity policy because it has always failed in the past,” he told a joint session of both houses of parliament on Monday.

His speech in the grand setting of the Palace of Versailles had been billed as an occasion to lay out the priorities for the second half of his presidency and to relaunch his reform agenda.

Facing a budget deficit of twice the limit set by European Union borrowing rules, Sarkozy pledged broad investment in fields ranging from education to health and research and said the money would have to be found to pay for it.

“We cannot keep fixing priorities and not provide the financial means necessary to reach them,” he said, adding the investment would require “considerable means”.

“We cannot satisfy them in the strict context of the annual budget,” he said.

The pledge came a day after European Central Bank President Jean-Claude Trichet said there was no room for new debt or spending and after Budget Minister Eric Woerth said the deficit would top 7 percent of gross domestic product in 2009 and 2010.

Sarkozy said the government would take out a new loan either from financial markets or the general public, as the government of former Prime Minister Edouard Balladur did in 1993.

He said a long-awaited cabinet reshuffle would be on Wednesday. One of its first tasks would be to decide priorities and the loan to finance them.

FRENCH MODEL

Sarkozy, who has frequently lambasted “Anglo-Saxon capitalism” said the crisis highlighted the virtues of France’s tradition of strong public investment and relatively generous social spending.

The speech was short on detailed announcements and the opposition Socialists, who boycotted the debate afterwards, dismissed it as “useless chatter” but its focus on investment was welcomed by the employers association Medef.

“The crisis has brought the French model back into fashion,” Sarkozy said, but promised not to shy away from difficult reform decisions, saying the crisis was a “historic chance” for change.

“What we don’t do now, we won’t do later,” he said.

Details of a pensions overhaul would be agreed after wide-ranging consultations next year, he said, adding “everything has to be put on the table”, including the highly sensitive issue of raising the retirement age.

He promised a reform of France’s complex web of regional and local authorities, an improvement of the overcrowded prison system and pledged to eliminate waste and improve efficiency.

He also aimed to change the emphasis of the tax system away from work and production and said he wanted to go “as far as possible” with a carbon tax that would help fight pollution.

Sarkozy was the first French president since the 19th century to address parliament. The event was made possible by a constitutional amendment he introduced last year.

He also gave his first public comment on a growing debate about the use of burqas by some Muslim women in France, saying the face-concealing garments had no place in the country as they were a sign of the subjugation of women. [ID:nLM350226] (Additional reporting by Estelle Shirbo; Editing by Janet Lawrence)