Friday

22nd Jun 2018

France adopts 'combat budget' for 2013

France's Socialist government on Friday (28 September) unveiled €30bn worth tax hikes and spending cuts in a bid to bring the public deficit in line with EU rules next year.

Dubbed a "combat budget" by Prime Minister Jean-Marc Ayrault, the fiscal plan is based on sharp tax increases for the rich (75% on millionaires) and for companies expected to bring in €20bn.

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  • The Hollande government calls it a 'combat budget' for 2013 (Photo: Francois Hollande)

The budget is based on the assumption the economy will grow by 0.8 percent.

This may prove difficult, as France's growth was zero this year and the continuing eurozone crisis is worsening the prospects for next year.

Ayrault defended the growth forecast as "realistic" and promised that nine out of ten people with not have to pay extra taxes.

A further €10bn will be saved by curbing defence spending, prison buildings, transport infrastructure, cultural and ministerial budgets.

The budget is a key test of France's commitment to stick to the three-percent deficit target under EU rules after the election of Socialist President Francois Hollande, who had promised on his campaign trail to hire more teachers and lower the retirement age.

Ayrault insisted that bringing down the deficit from 4.5 percent of GDP this year to three percent next year was necessary in order for France to avoid the fate of its southern neighbours.

"If we abandon this goal, right away the rates will rise and then we will be in the same situation as Italy, in the same situation as Spain, and I do not want that," he said.

But economists at CitiGroup are sceptical that the calculations will hold and forecast a deficit of 3.7 percent next year.

Meanwhile, seen with EU eyes, the tax hikes and spending cuts are not the best Paris could have come up with.

"We want to see structural reforms, labour market reforms rather than tax increases and budget cuts. Structural reforms are the ones which unlock growth potential," one EU official told this website.

Paris has more breathing space than the likes of Spain, whose government has gone the extra mile on pension and labour market reforms in order to convince markets it does not need a full-blown bailout.

The deadline for submitting structural reforms plans for France is end of this year.

France is one of the 21 EU countries which are under increased supervision by the EU commission as they have overstepped the deficit threshold.

They need to submit their budgets for 2013 by 15 October, with the EU commission having the power to ask for adjustments and sanctions if its recommendations are not followed up. Austria, Bulgaria, Germany, Estonia, Finland and Sweden are the only countries currently outside this 'excessive deficit procedure'.

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French President Francois Hollande faced his first serious public backlash after up to 50,000 lined the streets of Paris on Sunday in protest against his €37 billion austerity budget.

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At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

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The EU should not overuse the financial system in order to achieve environmental goals, or it risks the emergence of a green bond bubble which would be detrimental to the financial sector and hinder the achievement of climate targets.

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Both the examples of Greece and Italy test the limits of a system with inherent weaknesses that feeds internal gaps, strengthens deficits and debts in the European South, and surpluses in the European North respectively.

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