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France unveils toughest ever budget as debt levels soar

PUBLISHED : Friday, 28 September, 2012, 1:21pm
UPDATED : Friday, 28 September, 2012, 8:49pm

France on Friday unveiled action to plug a 37-billion-euro hole in its public finances with the toughest package of tax rises and spending cuts the country has known in an economic downturn.

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

Ministers defended measures that included a 75 per cent top tax rate as unavoidable if France is to get its finances under control and meet European Union deficit targets deemed essential to avoid the collapse of the euro single currency.

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 the richest ten per cent would bear the brunt of the pain.

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

The budget breakdown indicated that France needs to make 36.9 billion euros (US$48 billion) 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 next year.

“The three per cent target is vital for the credibility of the country,” Finance Minister Pierre Moscovici said. “We are committed to it and we will meet it.”

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 next year, rising to 2.0 per cent in 2014) on which the budget figures are based.

The French economy is currently flat-lining and latest data on jobs – unemployment has topped three million, around ten per cent of the workforce – and consumer confidence 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, was even blunter: “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 beleaguered president, increasingly seen a hapless ditherer rather than the likeable regular guy he portrayed himself as during the campaign, was on Friday at the Paris Motor Show, a visit that was unlikely to cheer him up much given the parlous state of the French car industry.

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

A total of 10 billion will come from extra taxes on individuals and a further 10 billion 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.

Data released on Friday revealed that France’s national debt had risen to 91 per cent of GDP, a level the premier described as unsustainable.

“We have to break with this spiral of ever increasing debt,” Ayrault said. “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 ten French taxpayers will pay more as a result of Friday’s changes and he said increased taxes on business will not affect small and medium-sized enterprises that are crucial for job creation in the first stages of an economic recovery.

“The effort we are demanding from our biggest companies is reasonable and fair,” Ayrault said. “Not only have we spared small companies, we are going to help them create the jobs the country needs.”


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