France raises taxes in tough budget

29 Sep 2012, 2:04 pm   -   Source: AFP
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French President Francois Hollande releases a tax-heavy budget. (AAP)

French President Francois Hollande releases a tax-heavy budget. (AAP)

France has unveiled shock fiscal action to plug a 37 billion euro ($A46 billion) hole in public finances with the toughest package of tax rises the country has known in an economic downturn.

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France has unveiled shock fiscal action to plug a 37 billion euro ($A46 billion) hole in public finances with the toughest package of tax rises and spending cuts the country has known in an economic downturn.

The 2013 budget adopted by President Francois Hollande's cabinet commits the ruling Socialists to an austerity program at a time when the economy is teetering on the brink of recession.

Hollande defended measures that included a 75 per cent top tax rate as fair and unavoidable if France is to get its finances under control, meet EU deficit targets deemed essential to save the euro and kickstart the faltering economy.

"It's a combative budget aimed at cutting the deficit, improving our economic performance and restoring fairness," Hollande told his ministers, stressing that "the richest households" and the biggest companies would bear the brunt of the pain.

He also pledged there would not be "one more euro" of debt at the end of his five-year term.

But opposition critics derided a budget that will take billions out of the economy at a time when unemployment is close to record highs and contested government claims that only the richest 10 percent would pay higher taxes.

"France is headed into the wall," warned Bruno Le Maire of the main opposition UMP party. Former budget minister Valerie Pecresse asserted: "This budget means 100 per cent of French workers will be paying higher taxes."

The powerful CFDT union, however, hailed it as "an important step towards fiscal justice".

The budget breakdown indicate France needs to make 36.9 billion euros in savings if it is to meet its target of reducing its budget deficit from an anticipated level of 4.5 per cent of GDP this year to the EU ceiling of three per cent in 2013.

Economists are sceptical about the government's ability to meet the deficit target and have warned that the dampening effect of cuts and tax hikes will make it difficult to attain the growth (0.8 per cent for 2013, rising to 2.0 per cent in 2014) on which the budget figures are based.

The economy is currently flat-lining and latest data point to that trend continuing into the winter.

"A 1.5 per cent reduction of the deficit represents a considerable effort at the best of times. In a period of zero growth it would be exceptional," said Elie Cohen, director of research at the government-financed CNRS think tank.

Eric Heyer, of the Economic Conjuncture Observatory, added bluntly: "It has never been done before."

Friday's budget was the first since Hollande was elected president in June on a pledge to put economic revival at the top of the national and European agendas.

As the reality of the grim economic situation he inherited has sunk in, Hollande has seen his approval ratings freefall and he is now on the verge of becoming the most unpopular French leader in living memory.

The total of 36.9 billion euros of savings includes 12.5 billion euros of cuts - 2.5 billion euros on health spending and 10 billion euros across other government departments.

A total of 10 billion euros will come from extra taxes on individuals and a further 10 billion euros from new taxes on businesses. These are in addition to 4.4 billion euros worth of new taxes announced in July.

Prime Minister Jean-Marc Ayrault claimed the cuts and tax hikes would ensure France could continue to finance its high level of debt at historically low interest rates, unlike Spain and Italy.

Figures released on Friday revealed the national debt had risen to 91 per cent of GDP, a level described as "critical" and a threat to growth by Finance Minister Pierre Moscovici.

Ayrault said: "We have to break with this spiral of ever increasing debt. If we don't say stop now, our taxpayers will just go on paying indefinitely purely to meet the interest payments."

The much-trumpeted 75 per cent tax rate, which economists say will raise only marginal amounts, will apply to individuals with income above one million euros per year.

Ayrault has claimed that only one in 10 French taxpayers wil pay more as a result of Friday's changes and he said increased taxes on businesses will not affect small and medium-sized enterprises that are crucial for job creation in the first stages of an economic recovery.

 

France Economy

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