The French budget

One cheer

  by S.P. | PARIS

THE French government has hailed its 2013 budget, unveiled on September 28^th, as the “most important effort made for 30 years”. The good news is that it demonstrates a firm commitment by President François Hollande and his Socialist government to keep to its deficit-reduction promises. The less good news lies in the balance of taxes and spending that it uses to get there, its over-optimistic growth assumptions, and the political slight-of-hand in presenting this as a package that soaks only the rich.


First, one cheer for the determination to stick to a reduction of the government’s budget deficit to 3% in 2013. France has not balanced a budget since 1974, and does not enjoy a strong track record in keeping to reduction targets. The trio in charge—Mr Hollande, Jean-Marc Ayrault, his prime minister, and Pierre Moscovici, his finance minister—are all well aware that France’s credibility is on the line. They have each repeatedly stated in recent weeks that the country would do what it takes to keep to its promises. In a televised interview this week, Mr Ayrault described it as a matter of national sovereignty, since it is a means of reducing France’s reliance on the bond markets. In unveiling tax rises and spending cuts totalling €30 billion, Mr Moscovici has shown that France’s Socialist government is serious about fiscal consolidation.
Less satisfactory is the balance of the effort in the 2013 budget: two thirds of the savings are to come from tax increases, and only one third from spending cuts. Mr Moscovici says that, starting in 2014, the balance will shift to 50:50. Yet France is a country where public spending already accounts for 56% of GDP, more than even in Sweden, and where the overall tax take in the economy is considerably higher than in Germany. The €20 billion of tax increases are concentrated on big companies and on the rich. France will bring in a new 45% tax rate for incomes over €150,000 ($193,000) as well as a top rate of 75% for incomes over €1m. This latter rate, which Jean-Paul Ago, head of the L’Oréal cosmetics giant, this week said would make it “almost impossible” to attract top talent to France, will apply only for the next two years, according to current plans. Education, security and justice are spared the €10 billion of spending cuts. Most of the effort will instead fall on the defence budget, culture, agriculture and the environment.
All this may still not be enough, however, for France to reach the 3% target next year. This is because growth has come to a halt and few economists expect, as the government does, GDP growth in 2013 of 0.8%. The new government has already revised its forecast downwards once. The French economy has now registered three successive quarters without growth. If there is zero growth in 2013, according to the Cour des Comptes, the national audit office, France will need to make overall budget savings of €44 billion. This would require either extra measures next year—or a plea for more time.
Speaking on prime-time television, Mr Ayrault insisted this week that his 2013 budget spares the middle-classes and the less well-off: the only ones who lose out, he said, are the richest 10%. It is certainly true that, in terms of income tax, the burden falls wholly on the rich. Yet Mr Ayrault may be stoking up problems by himself with such claims. For the French know full well that other measures in the budget hit everybody, including increases in taxes on cigarettes and beer, and that the government has already voted an end to tax-free overtime, which directly affects the squeezed middle. In this budget, the new government has shown a certain resolve. But, in failing to be totally straight with voters upfront, Mr Ayrault may find it even harder to confront them with more bad news further down the line.