France's Prime Minister Francois Fillon leaves the Elysee Palace, Feb. 9, 2011.PHILIPPE WOJAZER/Reuters
France will seek to raise at least €10-billion ($14-billion U.S.) in extra revenues with a package including higher taxes on the rich and cuts in tax breaks, aimed at ensuring a slowdown does not undermine its Triple-A credit rating.
The package, hurriedly pulled together after French stocks were swamped by rumours of a possible rating downgrade this month, is expected to pare back tax exemptions and incentives worth an estimated €3-4 billion this year and a further €10-billion in 2012, French media and government sources said.
Prime Minister Francois Fillon convened a news conference on Wednesday to unveil details of the package put together under strict orders from President Nicolas Sarkozy, who interrupted his Riviera holiday last week for an emergency budget meeting.
Eight months from a presidential vote where he faces a tough battle for re-election, Mr. Sarkozy is steering clear of dramatic spending cuts of the kind imposed in Italy and Spain. His government has pledged instead more tax on high earners, in what analysts say is a symbolic gesture to sweeten the pill.
"These reforms will be fairly spread out in order to reduce the deficit and protect growth and jobs," Budget Minister Valerie Pecresse told a news conference, adding there would be no wide-ranging tax rises or reductions in welfare services.
The measures could instead target corporate tax credits and exemptions from welfare contributions on overtime, according to officials and other groups involved in consultations.
More belt-tightening became inevitable after France's €2-trillion economy stagnated in the second quarter, making it impossible to meet its deficit targets without further action.
The government had based its budget on growth of 2.0 per cent this year and 2.25 per cent in 2012, but economists now warn that growth could dip below 1.5 per cent next year.
Ms. Pecresse appeared to hint on Wednesday that the government would reduce its growth forecasts, saying: "An economic framework will be presented with the measures this evening."
With France in the spotlight since Standard & Poor's downgraded the United States, ministers have repeatedly asserted that deficit targets were "sacrosanct," even though a sputtering economy may make them harder to reach.
Mr. Sarkozy's conservative government aims to cut the deficit from 7.1 per cent of gross domestic product in 2010 to 5.7 per cent this year and then to 4.6 per cent in 2012.
Speculation that France might lose its prized top rating hit the shares of French banks this month and drove the premium investors demand to hold French debt instead of low-risk German bonds to a euro lifetime high of about 90 basis points.
"We believe the confirmation of France's determination to meet fiscal targets should prove supportive, helping to dispel any doubts about the sustainability of France's Triple-A rating," Société Générale's chief France economist Michel Martinez said.
Targeting tax breaks is fertile ground for savings, with the finance ministry estimating exemptions from taxes are worth €75-billion in total. Exemptions from welfare contributions are probably worth another €45-billion.
Some of France's richest people are even offering to pay more taxes. The head of advertising giant Publicis SA, Maurice Levy, is leading a campaign with other wealthy French people for a special contribution to the state's coffers.
"I don't want it to be only symbolic, I think it should be a real contribution," he told Reuters, saying Europe's debt crisis was concentrating minds on seriously tackling France's burden.
In a sign the French public is losing its traditional indifference to public finances, 54 per cent of people said they were a serious problem that needed addressing even if that meant painful measures, according to an IFOP survey on Tuesday.
Even after the reform is passed, France will have more to do to ensure the long-term viability of its finances, according to observers such as the International Monetary Fund, which called for cuts to one of Europe's highest levels of state spending.