Austerity package aims to keep Moody's triple-A credit rating

FRANCE:FRANCE PLEDGED yesterday to raise corporate tax rates for big firms as it moved to protect its triple-A credit rating by unveiling the second austerity package in three months.

Prime minister François Fillon said the government would need to save €100 billion by 2016 to keep it on target to balance the budget – a feat last achieved in 1974.

The new austerity drive was brought forward by the threat to France’s prized triple-A credit rating, which is due to be reviewed by Moody’s in January, and the government’s recent lowering of its 2012 growth projection from 1.75 per cent to 1 per cent.

A downgrade would have powerful symbolic importance. President Nicolas Sarkozy – who faces an election campaign in six months – has made the retention of the triple-A one of his priorities.

The new package aims for budget savings of €7 billion in 2012 and €11.6 billion in 2013. It includes a “temporary” 5 per cent rise in corporate tax for firms with a turnover of more than €250 million, an increase in the discounted rate of VAT from 5.5 to 7 per cent, and accelerating the shift in retirement age from 60 to 62 in 2017 a year earlier than planned.

French ministers have been under instructions in the past year to avoid using the word “austerity”, but yesterday Mr Fillon abandoned that strategy and said the savings – coming on top of a €12 billion cutbacks plan published in August – were the sign of a responsible government acting in a situation where “bankruptcy is no longer an abstract term”.

“We have only one goal – to protect the French people from the serious difficulties that many European countries are now facing,” he said. “I believe our citizens are now aware of the risks to our livelihoods and futures caused by deficits and debt.”

Mr Fillon also announced the salaries of Mr Sarkozy and his ministers would be frozen and called on business leaders to do the same, saying pay rises for some bosses were “frankly indecent”.

Opposition figures pointed out Mr Sarkozy more than doubled the president’s salary to €250,000 when he came to power in 2007.

The new measures reflect French hopes of preventing the euro zone debt crisis spreading to its second-largest economy. The country’s budget deficit stands at 5.7 per cent of gross domestic product, public debt is at € 1.7 trillion and the spread between French and German 10-year bonds last week reached their highest level since the creation of the euro.

The Italian crisis has amplified concerns in Paris. France’s largest banks had an overall exposure of $416.4 billion to Italy at the end of June, according to the Bank for International Settlements. That was more than twice German banks’ exposure and half of all European bank lending to Italy. With unemployment at over 9 per cent and polls showing he is flagging, the austerity plan comes at an awkward time for Mr Sarkozy.