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UPDATE 3-France targets deficit cut with tax-hiking budget

by on September 28, 2012 10:18 am BST
 

Fri Sep 28, 2012 6:18am EDT

* Budget aims to slash deficit to 3.0 pct/GDP in 2013

* Bulk of savings comes from tax on rich, business

* Economists say budget based on optimistic growth forecast

By Daniel Flynn and Leigh Thomas

PARIS, Sept 28 (Reuters) – President Francois Hollande’s
Socialist government unveiled sharp tax hikes on business and
the rich on Friday in a 2013 budget aimed at showing France has
the fiscal rigour to remain at the core of the euro zone.

The package will recoup 30 billion euros ($39 billion) for
the public purse with a goal of narrowing the deficit to 3.0
percent of national output next year from 4.5 percent this year
– France’s toughest single belt-tightening in 30 years.

But with record unemployment and a barrage of data pointing
to economic stagnation, there are fears the deficit target will
slip as France falls short of the modest 0.8 percent economic
growth rate on which it is banking for next year.

The budget will also disappoint pro-reform lobbyists by
merely freezing France’s high public spending rather than daring
to attack ministerial budgets as Spain did this week in a bid to
avoid the conditions of an international bailout.

“This is a fighting budget to get the country back on the
rails,” Prime Minister Jean-Marc Ayrault said, adding that the
0.8 percent growth target was “realistic and ambitious”.

“It is a budget which aims to bring back confidence and to
break this spiral of debt that gets bigger and bigger.”

With public debt at a post-war record of 91 percent of the
economy, the budget is vital to France’s credibility not only
among euro zone partners but also in markets which for now are
allowing it to borrow at record-low yields under two percent.

The government said the budget was the first in a series of
steps to bring its deficit down to 0.3 percent of GDP by 2017 –
missing an earlier target of a zero deficit by then.

Of the total 30 billion euros of savings, around 20 billion
will come from tax increases on households and companies, with
tax increases already approved this year to contribute some 4
billion euros to revenues in 2013. The freeze on spending will
contribute around 10 billion euros.

FEARS OF EXODUS

To the dismay of business leaders who fear an exodus of top
talent, the government confirmed a temporary 75 percent
super-tax rate for earnings over one million euros and a new 45
percent band for revenues over 150,000 euros.

Together, those two measures will bring in around half a
billion euros. Higher tax rates on dividends and other
investments, plus cuts to existing tax breaks will bring in
several billion more.

Business will be hit with measures including a cut in amount
of loan interest which is tax-deductible and the cutting of an
existing tax break on capital gains from certain share sales –
moves worth around four billion and two billion euros each.

Four months after he defeated Nicolas Sarkozy, Hollande’s
approval ratings are in free-fall as many French feel he has
been slow to get to grips with the economic slow-down and
unemployment at a 10-year high and rising.

Data on Friday confirmed France posted zero growth in the
second quarter, marking nine months of stagnation, as a pickup
in business investment and government spending was offset by a
worsening trade balance and sluggish consumer expenditure.

Despite a rise in wages, consumers – traditionally the motor
of France’s growth – increased their savings to 16.4 percent of
income from 16.0 percent a year earlier. In another setback,
other data showed consumer spending dropped 0.8 percent in
August.

“Altogether the data paint the picture of a stagnating
economy,” said BNP economist Dominique Barbet.

BNP Paribas economist Helene Baudchon said the deficit was
likely to come in above 3.0 percent due to the weak growth
outlook. “As things stand, achieving a deficit of 3.3 percent
would in itself be a remarkable outcome,” she said.