21st Oct 2016

French tax hikes would 'destroy' growth, EU says

New measures to reduce France's budget deficit must come from public spending cuts, the EU's economic affairs commissioner said Sunday (25 August), warning that any new taxes would “destroy growth and handicap the creation of jobs."

In an interview with the French weekly Le Journal du Dimanche, Olli Rehn, commissioner for economic and monetary affairs, said that tax levels in France had reached a "fateful point". “Budgetary discipline must come from a reduction in public spending and not from new taxes,” he added.

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Rehn's remarks come as Francois Hollande's socialist government race to finalise reforms of the country's budgetary plans, including reforms to the French healthcare and pension schemes. Under the EU's recently revised rules on economic governance, governments must submit their budget proposals to the EU executive for an opinion prior to their adoption, although they are not legally required to apply the Commission's fiscal recommendations into law.

That said, Rehn's comments are unlikely to be well received by a government which has repeatedly voiced its irritation with the Commission's criticism. "The Commission cannot dictate to us what we have to do. It can simply say that France must balance its public accounts," said Hollande in May.

The French economy recorded a better than expected 0.5 percent growth rate in the second quarter of 2013, which will dampen concerns that the country's economy will remain stagnant in 2013.

In the first 14 months of his Presidency, Hollande has come under increasing pressure from Brussels to bring down France's budget deficit and liberalise its labour market. In May, Paris was given a two year extension by the European Commission, until the end of 2014, to bring its deficit below the EU-required 3 percent of GDP. Rehn warned Hollande that it was "crucial that it (France) uses this extra time to overcome problems with its competitiveness".

Hollande is also under pressure from his governing socialist party to increase employment and maintain public spending levels. In July, the country's jobless total reached 3.279 million, an increase of 14,900 people from May, dealing a blow to Hollande's pledge to reduce unemployment by the year's end.

Unlike the austerity measures in most other European countries, Hollande's government has put the emphasis on higher taxes rather than spending cuts as it seeks to balance the country's books. The French tax burden currently stands at around 48.5 per cent of GDP

On Sunday prime minister Jean-Marc Ayrault reiterated plans to press ahead with a “carbon” or “green” tax to try to push the French economy away from dependence on fossil fuels.

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