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France yesterday unveiled action to plug a €37 billion (HK$369.5 billion) hole in its public finances with the toughest package of tax rises and spending cuts the country has known in an economic downturn.
The strong French response came the same day an audit showed that Spain's banks have a combined capital shortfall of €59.3 billion.
The 2013 budget adopted by French 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 EU 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 10 per cent would bear the brunt of the pain.
Former budget minister Valerie Pecresse said: "This budget means 100 per cent of workers will be paying higher taxes."
The Spanish bank audits were a stress test designed to remove doubts about a financial industry pummeled by real estate losses, and showed no capital deficit for seven out of 14 banks.
Spain commissioned the independent stress test as part of the conditions agreed in July for a European bailout of as much as €100 billion euros for its banks.
The budget breakdown indicated France needs to make €36.9 billion in savings if it is to meet its target of cutting its budget deficit from an anticipated level of 4.5 per cent of GDP this year to the EU ceiling of 3 per cent in 2013.
Finance Minister Pierre Moscovici said France's public debt had reached "an absolutely critical level" at which it had become a threat to economic growth. This comment followed the publication of figures showing the debt had risen to 91 per cent of GDP at the end of June.
Economists are sceptical about the government's ability to meet the deficit target and warned the dampening effect of cuts and tax hikes would make it difficult to attain the growth on which the budget figures are based.
The French economy is currently flat-lining and latest data on jobs 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 at the CNRS think-tank.


France unveils toughest-ever budget

Prime Minister Ayrault (left) takes a tough line. Photo: Reuters

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France cuts costs while raising taxes, as audit shows Spanish banks have a €59 billion shortfall


France unveils toughest-ever budget

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}France cuts costs while raising taxes, as audit shows Spanish banks have a €59 billion shortfall

France cuts costs while raising taxes, as audit shows Spanish banks have a €59 billion shortfall