French Government Reluctant to Cut Spending

Austerity in France means raising taxes.

While French president Nicolas Sarkozy is promoting fiscal consolidation across the European Union, his own government seems reluctant to cut spending. Its latest austerity package is almost entirely composed of tax increases with a mere €1 billion in spending reductions.

Prime Minister François Fillon unveiled €12 billion worth of additional deficit reduction measures last week in an effort to reduce his administration’s €95.7 billion shortfall — from equaling 7.1 percent of gross domestic product to 5.7 percent by the end of the year.

Sarkozy aims for a deficit equaling 3 percent of GDP in 2012, which would comply with the fiscal maximum enshrined in the eurozone’s Stability and Growth Pact, but the current outlooks suggests that the French government will face a 4.6 percent shortfall during election year.

The new deficit reduction package largely consists of revenue increases, including higher consumption tax rates on liquors, tobacco and soft drinks as well tax hikes on high incomes and capital gains.

Fillon has also said to favor ending a tax deduction on capital gains for the sale of second homes — an unpopular measure in a country where many urban middle-class families own vacation retreats in the countryside.

France was among several European nations to hastily announce additional austerity measures this month when markets called into question France’s creditworthiness which is currently rated AAA by all major credit rating agencies. At nearly 84 percent of GDP, France’s public debt is formidable but not much higher than Germany’s at 79 percent.

Germany, however, has boasted solid economic expansion unlike France which had to adjust its growth forecast from 2 to 1.75 percent this year and next — and even those projections are deemed optimistic by independent observers. Nearly one out of ten French workers is unemployed and industrial output contracted by 1.6 percent this summer.

The tax increases that came out of Paris last week are not likely to spur job growth. Instead, they will add to regulatory uncertainly already prevalent in France where the state accounts for more than half of the national economy and continues to dominate entire industries including electricity, postal services and railways. The private labor market is burdened with rigid regulations that exacerbate unemployment and undermine France’s competitiveness within the eurozone.

President Sarkozy made some attempts at deregulating the French economy after he came to power four years ago but in the wake of the 2008 financial crisis, he appeared to abandoned laissez-faire and complained that nothing had “gone to labor” in the preceding decade when bankers supposedly enriched themselves at the expense of the working man.

The rhetoric from the socialist opposition has been all the more vehement. Ségolène Royal, who lost the 2007 presidential election to Sarkozy, suggested last week that stock options and speculation on sovereign debt should be banned. Arnaud Montebourg, a younger presidential hopeful, has called for “deglobalization” and wants to prohibit banks from “speculating” with their clients’ deposits.

Other presidential candidates like Martine Aubry and François Hollande want to bring down the pension age back to sixty after it was raised to 62 by Sarkozy this year. Like a majority of leftists voters, they are opposed to the notion of spending cuts altogether and would rather balance the books with tax hikes alone.

On the other end of the political spectrum, the Front national, which was polling at roughly 17 percent of the vote earlier this year, is similarly critical of “global liberalism” under the leadership of Marine Le Pen. Her protectionist economic policy seems part of an attempt to appeal to blue-collar voters.

The far right could well steal crucial votes from Sarkozy’s centrist conservative party in elections next year, allowing a socialist contender to emerge as the inevitable victor from a runoff against Le Pen.