French President Nicolas Sarkozy’s government announced tax increases on the highest earners, capital gains, alcohol, tobacco, and sugared drinks to meet deficit targets and avoid the worst of the euro debt crisis.
Prime Minister Francois Fillon announced euro 12 billion ($17 billion) of measures in 2011 and 2012 and cut economic growth forecasts, saying the euro region’s second-largest economy will expand by 1.75 per cent in each year. He said France’s deficit would be 4.5 per cent of gross domestic product in 2012, when Sarkozy seeks re-election, beating the target.
“We have passed the threshold of tolerance on debt,” Fillon told reporters at a briefing in Paris. Yet, “today’s policies are not emergency austerity measures.”
Sarkozy, like President Barack Obama, must balance his re- election bid against the need to fix his nation’s finances. France, the second-biggest contributor to euro bailout funds, now pays a premium of 64 basis points over Germany to borrow for 10 years, up from 27 basis points when the rescue system was set up in May 2010. Both countries have the top credit rating.
Fillon repeated pledges to reduce the deficit, which reached 7.1 per cent in 2010. It is targeted to drop to 5.7 per cent this year and three per cent by 2013. Debt will peak at 88 per cent of GDP in 2013, the International Monetary Fund says.
Spending will be cut by euro 500 million this year and euro 1 billion in 2012, Fillon said, without providing details.
FRANCE VULNERABLE
The reductions became urgent this month when speculation mounted that France’s top credit rating was vulnerable as the euro-area debt crisis crimped growth and the US was downgraded by Standard & Poor’s. Fillon cut forecasts of economic expansion from two per cent this year and 2.25 per cent in 2012.
The biggest revenue raiser would yield euro 2.2 billion next year and euro 200 million in 2011. The measure would cancel the capital-gains exemption from property sales, excluding the principal residence. A stricter inflation-based standard will be applied to the calculation.
Another euro 1.5 billion will be generated next year, and euro 500 million this year, by limiting companies’ ability to carry over losses as tax write-offs for one year. And euro 1.5 billion in the next two years will come from a tax increase on capital gains.
An exceptional tax surcharge of three points on those with incomes above euro 500,000 will generate about euro 200 million next year.
The emphasis on what Fillon called “fairness” is “a necessary feature to avoid street protest, with higher taxes for both household and corporations,” Dominique Barbet, an economist at BNP Paribas in Paris, said in an interview.
The cost of cigarettes will rise by about six per cent this year and again next year, yielding euro 700 million. The imposition of a tax on sugared drinks will yield euro 100 million. The tax on alcohol excludes wine, rum and local products.
