France introduces a tax-cutting budget

When the French Minister of the Economy, Finance and Industry, Mr Strauss-Kahn, presented his 1999 budget yesterday , he said it was "in favour of employment, social justice and the environment" and "faithful to the commitments made by the Left."

Because taxes are too high in France - "and because the French have given a lot to reduce the deficit and qualify for the euro" - the government intends to reduce taxes by Ffr16 billion (£1.9 billion) next year. A projected 3 per cent growth rate will enable it to do this, while at the same time raising government spending by 1 per cent after inflation.

"Some would probably have preferred we increase public spending," Mr Strauss-Kahn and the Junior Minister for the Budget, Mr Sautter, wrote in an opinion piece in Le Monde. "The days when the Left identified itself with the endless expansion of the public sector are long past."

Whatever the philosophy behind it, the budget is good news for the business community, who were disheartened by last year's increase in corporate taxes and especially by the new law establishing a 35-hour work week from July 2000.

The most dramatic tax reduction - and pro-business move - is the abandonment of the "professional tax" based on a company's payroll. "Anyone who has seen a professional tax form has a hard time imagining the absurdity we have reached," Mr Strauss-Kahn and Mr Sautter wrote. They claim the measure will create 100,000 jobs because it will remove a disincentive to hiring. It will apply to 70 per cent of businesses in 1999, and to all companies after five years.

Despite their delight in the unexpected death of the "professional tax", French management still hope to see a reduction of the social security charges - especially on low salary jobs - that make it so costly to employ people in France.

Regarding the "professional tax" reform, the economic daily Les Echos said the government was "committing public finance in favour of business for the long term." Mr Strauss-Kahn is seen as the most economically liberal member of the government.

He is also providing further corporation tax relief by reversing measures introduced last year. But to satisfy their Communist allies, the Socialists will recoup the loss by reducing tax credits on dividends and life assurance policies.

In another concession to the Communists, Mr Strauss-Kahn intends to raise revenue from wealth taxes, (known by the initials ISF) by 30 per cent merely by closing loop-holes. Works of art remain exempt from taxation, but a new 1.8 per cent tax will be imposed on the 800 biggest fortunes in France, which exceed Ffr100 million (£11.9 million) each.

VAT on gas and electricity bills will decrease from 20.5 per cent to 5.5 per cent, amounting to Ffr4 billion (£476 million) in reduced taxes, or Ffr130 (£15.48) per consumer. Mr Strauss-Kahn pointed out that this reduction, along with the lifting of stamp taxes on identity cards and drivers' licenses, will help poor people most. The reassessment of the "habitation tax" on lodging is also intended to benefit poor people.

Mr Strauss-Kahn's prediction of a 3 per cent growth rate this year and a 2.3 per cent budget deficit in 1999 may be over-optimistic. The Paris-based Organisation for Economic Co-operation and Development (OECD) forecasts 2.9 per cent growth this year and a 2.6 per cent deficit next year.