France’s new Socialist government announced €13.3 billion in extra taxes on big business and the rich yesterday to meet deficit targets and balance its budget by 2017.
The government said the economy was expected to rally with growth of two per cent per year from 2014 to 2017.
The figures came in a revision of the 2012 budget a day after the government cut growth forecasts for this year and next, and warned of the “crushing” burden of deficits and debt.
It announced €13.3 billion in tax increases this year and in 2013, a modest spending freeze and action to crimp a rise of public spending in coming years.
The tax increases this year will fall about equally on businesses, notably big businesses, oil companies, banks, and also on private taxpayers. The taxes on households will fall mainly on high earners and the rich.
The overall announcement was concentrated on tax rises.
But in addition to freezing a small amount of spending this year, the government aims to allow expenditure, after including inflation, to rise by 0.8 per cent per year up to 2017.
This is less than the trend of two per cent, the figure of 1.1 per cent that the socialists gave during the election campaign, and is well short of forecast growth from 2014 of two percent. These policies are intended to reduce the overall ratio of public spending to gross domestic product from 56.2 per cent this year to 53.4 per cent in 2017.
The Socialists won power from former centre-right president Nicolas Sarkozy with a campaign to switch the focus in the eurozone debt crisis from austerity to growth.
They promised to reverse some reforms by the previous government, to increase some public spending, but to also respect commitments to the European Commission to correct public finances.
The statement said that the public deficit will fall to 4.5 per cent of output this year from 5.2 per cent in 2011, and to the EU ceiling of three per cent next, and will be in balance in 2017. France has run deficit budgets since the 1970s.
The public debt of accumulated deficits will rise above 90 per cent of output to a high point of 90.6 percent in 2013, before falling to 82.4 per cent in 2017.
The outlook for inflation this year was increased from 1.8 per cent to 1.9 per cent.
Market attention was closely focused on the new government’s policy, particularly in view of the pivotal role of France, alongside Germany, in the eurozone debt crisis.
These figures are based on expectations that the economy will grow by 0.3 per cent this year, 1.2 per cent next year and then by two per cent up to 2017.
At Berenberg Bank, senior economist Christian Schulz commented that the growth assumptions were optimistic, that the overall figures would leave the deficit-output ratio at a high level, and that the government was delaying “necessary spending cuts”.
Most peripheral countries in the eurozone had made “serious progress” in reducing their fiscal and external deficits, but “France lags behind”.
The national audit office, in a report requested by the new government under President Francois Hollande and headed by Prime Minister Jean-Marc Ayrault, had warned on Monday that the government would have to take extra budget action.
To meet the deficit targets this year and next, the government would have to correct its budgets by up to €43 billion in the two years.
On Tuesday Ayrault also downgraded the growth outlook for these two years, while blaming the late government for increasing the debt.
Under the revised budget, taxes will rise to generate an extra €7.2 billion this year.
A freeze on some spending will save €1.5 billion.
Next year, tax increases will generate an extra €6.1 billion.