France's budget promises tax hikes and spending cuts

France unveiled a tough budget for 2013 on Friday, with a focus on austerity to get the country’s public finances in order. The package of tax rises and spending cuts hopes to reduce France’s budget deficit, in line with EU targets.

Reuters/Philippe Wojazer

"The three percent target is vital for the credibility of the country," said Finance Minister Pierre Moscovici. "We are committed to it and we will meet it."

France needs to come up with 36.9 billion euros in savings in order to get its budget deficit down from 4.5 percent to the EU aim of three percent.

Included in those savings will be 12.5 billion euros of cuts – with 2.5 billion coming from health spending and ten billion from across other governmental sectors. Tax rises will make up the remaining amount, with ten billion coming from extra taxes on individuals, and another ten billion from taxes on businesses.

As anticipated, a 75 percent tax rate will be applied to individuals earning over one million euros per year.

Our analyst says:

Emmanuel Martin, an economist with the Atlas Research Group, says the tax hikes within France's new budget would be suitable for minor recessions, but nothing as severe as Europe's current debt crisis.

“Just look at Greece and Spain. You cannot reduce your deficits by increasing taxes. There has to be some sort of reform in order to rationalise public spending; to rationalise the way the state works, the way the local governments work. Otherwise this increase in taxation just stifles the economy and creates recessions.

We have a very complex, decentralised [system of] administration. We could, for instance, get rid of one layer of this administration, and this would save a lot of money. But this is not the path that the government chose, and what the government chose is what we call a ‘choc fiscal’, a taxation shock, which is actually going to be a growth killer. And it’s ironic for President Hollande, who claimed that he was in favour of growth whilst campaigning for the presidential elections, to now propose policies that will actually kill growth.

The government wants next year's [growth] to be 1.2 percent, then they revised the forecast to 0.8 percent. But still, economists think that it’s going to be 0.3, which means that the government is still very optimistic."

While Prime Minister Ayrault claimed that only one in 10 taxpayers will actually pay more after Friday’s budget changes, former budget minister Valerie Pecresse said on French public radio on Friday that "this budget means one hundred percent of French workers will be paying higher taxes."

But Ayrault was confident that the cuts and tax hikes would help the country finance its high level of debt at low interest rates.

"We have to break with this spiral of ever-increasing debt," he said. "If we don't say stop now, our taxpayers will just go on paying indefinitely, purely to meet the interest payments."

Data out on Friday showed that France’s national debt had reached 91 percent of GDP.

Other opponents expressed worries on Friday that the new budget would take billions from an economy already suffering from high unemployment rates.

Unemployment levels reached over three million on Wednesday – nearly ten percent of the workforce.

The Socialist government, however, maintains that the tax hikes on businesses will not affect small and medium-sized businesses, which are essential for job creation during a period of economic downturn.

"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."

Friday’s budget is the first for Hollande since he was elected president in June, and threatens to challenge his already shaky approval ratings. Recent polls showed Hollande’s popularity is down to some of the lowest levels in history.