More Tax Increases in France to Balance Budget

The conservative prime minister, François Fillon, unveils another €7 billion worth of austerity measures.

France on Monday announced an additional €7 billion worth of austerity measures for 2012 and many billions more in spending cuts and tax increases in order to balance the budget in five years.

The second largest economy in the eurozone, France is struggling to retain its top credit rating. The partial default of Greece will probably require Paris to recapitalize French banks that have invested heavily in Greek sovereign bonds while interest rates on Italian debt are rising.

French public finances are in dire straits as well. The government’s shortfall is expected to reach €96 billion this year, or 7.1 percent of gross domestic product. The public debt already equals 84 percent of GDP.

Austerity measures

The conservative prime minister, François Fillon, unveiled €12 billion worth of austerity measures this summer to shrink the deficit to 5.7 percent of GDP. President Nicolas Sarkozy hopes to bring the deficit under 3 percent by 2012, when he is up for reelection, but independent forecasts suggest that it will be closer to 4.6 percent by then.

Fillon introduced mostly tax hikes in August, including higher consumption tax rates on liquors, tobacco and soft drinks as well tax increases for high incomes and capital gains.

He also said he favored eliminating the tax deduction on capital gains from the sale of second homes at the time, an unpopular measure in a country where many urban middle-class families own vacation retreats in the country.

The most recent plan includes a temporary 5-percent rise in corporate tax and an increase in the lowest value-added tax bracket from 5.5 to 7 percent.

The goal, said Fillon, is to produce €65 billion of savings before 2016 in order to reduce the deficit gradually to zero.

Gloomy forecasts

His government probably won’t be around to implement the necessary cuts. Opinion polls suggest that the opposition Socialists will win both the presidency and a majority in parliament next year. They would be even less inclined to reduce government spending.

The latest round of austerity followed the publication of lowered growth forecasts for 2012. The French economy is now expected to expand 1 percent against the 1.75 percent that was projected earlier.

Higher tax rates are unlikely to stir a faster recovery. France already has relatively high rates. The top corporate tax is 34.4 percent. That compares to 15.8 percent in Germany. Total tax revenue as a percentage of GDP was 44.6 percent in 2010, when a local business tax was eliminated in an effort to support small enterprise.