France budget: Taxes favoured over spending cuts

Jean-Marc Ayrault: "The effort we are asking people to make is necessary and fair"

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France has unveiled its budget for 2013, avoiding big austerity spending cuts in favour of higher taxes on the wealthy and big businesses.

French Prime Minister Jean-Marc Ayrault confirmed that there is to be a new 75% tax rate for people earning more than 1m euros (£800,000; $1.3m) a year.

But he insisted that nine out of 10 citizens will not see their income taxes rise in the new budget.

The government plans to raise 20bn euros in extra revenue.

That compares to 10bn euros in spending cuts.

The emphasis on tax rises is a policy of the new French President Francois Hollande that is against the prevailing mood of Europe where countries from Ireland to Greece are slashing spending to try to placate investors and lower borrowing costs.

'Bucks the trend'

The BBC's Chris Morris noted that many of the Hollande government's policies come from raising taxes rather than cutting spending and compared with other countries in Europe pushing through painful austerity, "France is resisting such radical surgery".

"Protection of its social model comes at a cost. For all the talk of a 'one-size-fits-all' economic policy across the eurozone, France continues to try to buck the trend."

Mr Ayrault called it "a courageous, responsible budget - a budget of conquest".

Measures in the budget include:

Analysis

Francois Hollande came to power criticising the policy of austerity-first. Growth would be the priority. Now he is seeking to dampen expectations.

There was confirmation earlier that there has been no growth for three consecutive quarters. France is stagnating. Unemployment has risen above three million and the president's approval ratings are falling.

This budget, he said, would be France's toughest single belt-tightening in 30 years. With public debt at a post-war record of 91% of the economy, the budget is being seen as a marker of what kind of reform we are likely to see.

Mr Hollande will be focusing on higher taxes, instead of the more painful spending cuts we have seen in the likes of Greece and Spain, in spite of the warnings from a growing number of analysts that the level of state expenditure is no longer sustainable.

For the moment, interest levels are historically low as investors look for safe havens away from Spain and Italy, but if the markets sense this government is not serious about reform, that could quickly change.

  • A new 75% tax on the richest earning more than 1m euros
  • A 45% income tax rate on incomes over 150,000 euros a year
  • A freeze in government spending, excluding debt repayments and pensions
  • The elimination of a ceiling on "l'impot de solidarite sur la fortune", or wealth taxes, so that assets of more than 1.3m euros will be taxed at 1.5%
  • The reduction of tax exemptions for loan payments by large corporations
  • Capital gains and dividends will now be subject to the income tax regime

While the cuts in 2013 will be two-thirds comprised of tax increases and one-third from spending cuts, the government said that from 2014 it would be divided equally.

"The government has understood that the increase in the public debt has got to be halted but the way that they are doing it is not the right way," said Eric Chaney, chief economist at French insurer Axa.

"It amounts to strongly increasing the tax burden on companies, their shareholders and executives, in other words those who create added value. It will lead to an even bigger loss of competitiveness and so a reduction in long-term growth."

'Fighting budget'

In its first budget, the Socialist government insisted its promise to cut the annual deficit to the eurozone limit of 3% of GDP next year.

The deficit this year is expected to be 83.6bn euros, which is 4.5% of GDP.

Official figures on Friday showed that French public debt had hit 91% of GDP between April and June this year, up from 89.3% at the end of March, which was still well above the eurozone limit of 60%.

Mr Ayrault pointed out that debt had grown by 30% of GDP in the past five years.

He said that the budget would encourage small and medium businesses and that taking risks would also be encouraged.

Mr Ayrault said that France was strong when it set itself ambitious targets.

But some analysts said that the targets were too ambitious because they assumed too much growth for the coming years.

'Bad choice'

The budget has been controversial, with some top earners threatening to leave the country as a result of the planned tax rises.

President Hollande was elected on a platform of abandoning austerity and encouraging growth and his popularity in France has suffered as a result of the need to cut debt.

Opposition parties have argued that more savings should have been found from cutting public spending so fewer tax rises would have been necessary.

"Never have households and companies been subjected to such a fiscal shock," said Gilles Carrez, conservative chairman of the French parliament's finance committee.

"It's a very bad choice. More savings should have been made."

The national secretary of the French Communist party, Pierre Laurent, was also critical of the plans.

"We already know that the goal of 3% isn't tenable for a very basic reason: there isn't enough basic growth to get there," he said.

"The budget will rather worsen the situation, because we know that the current austerity recipe is pushing the economy into a recession."

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