France scaled back its economic growth expectations today and announced it will seek €11 billion in additional budget savings in 2012 to ensure it stays on track with deficit targets.
Prime minister Francois Fillon said the government has cut its outlook for 2012 gross domestic product (GDP) growth to 1.75 per cent from 2.25 per cent. It has also trimmed its 2011 growth forecast to 1.75 from 2.0 per cent.
Explaining that debt mountains in the rich world were dragging on global growth, Mr Fillon said the government will seek to impose a new 3 per cent tax on annual revenues above €500,000 and modify a tax on real estate capital gains as it tries to stick to a deficit target of 4.5 per cent of GDP next year.
"This is a rigorous policy that will allow France to remain relaxed," Mr Fillon told a news conference. "Our country must stick to its (deficit) commitments. It's in the interest of all French people."
President Nicolas Sarkozy ordered his budget and finance ministers to come up with new deficit-cutting measures at an emergency government meeting earlier this month, interrupting his summer holiday after a market meltdown demonstrated concern over French public finances.
Facing a tough battle for re-election in April, Mr Sarkozy has sought to steer clear of painful austerity measures such as those seen in Italy and Spain.
"We have been careful to choose measures that reinforce fiscal and social justice," Mr Fillon said.
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.
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 AAA rating," Societe Generale'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 said, 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
yesterday.
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.
Reuters
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