FRANCE TODAY UNVEILED action to plug a €37 billion hole in its public finance 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 programme at a time when the economy is teetering on the brink of recession.
Ministers defended measures that included a 75 percent 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 percent 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 percent of French workers will be paying higher taxes.”
The budget breakdown indicated that France needs to make €36.9 billion in savings if it is to meet its target of reducing its budget deficit from an anticipated level of 4.5 percent of GDP this year to the EU ceiling of three percent in 2013.
“The three percent target is vital for the credibility of the country,” Finance Minister Pierre Moscovici said. “We are committed to it and we will meet it.”
Hollande’s approval ratings are in freefall
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 percent for 2013, rising to 2.0 percent 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 percent of the workforce – and consumer confidence point to that trend continuing into the winter.
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 of savings includes €12.5 billion of cuts – €2.5 billion on health spending and €10 billion 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 worth of new taxes announced in July.
Prime Minister Jean-Marc Ayrault claimed the cuts/tax hikes would ensure France could continue to finance its high level of debt at historically low interest rates, unlike Spain and Italy.
The 75 per cent tax rate
The much-trumpeted 75 percent 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.”