France's Socialists take aim with new budget

July 27, 2012 - 12:39 PM
France Hollande

French President, Francois Hollande reacts to media with Andorra's Prime Minister, Antoni Marti Petit, unseen, at the Elysee Palace, Paris, Thursday, July 26, 2012. (AP Photo/Jacques Brinon)

PARIS (AP) — President Francois Hollande's new Socialist administration is starting to shake up French policy on whom to tax and how to spend —changes that would effectively roll back much of what ex-President Nicholas Sarkozy and his center-right government accomplished.

Under an amended 2012 budget being pushed through Parliament, wealthy people and large companies are likely to see more of their earnings taxed, while government spending has remained largely untouched. The budget is a clear contrast with the rest of Europe, where austerity cuts are being introduced to reduce deficits. The budget also contains provisions that would sweep away efforts by the previous administration to shake up labor market rules that favor workers over businesses.

Business leaders are worried that the first major act as France's new leader will set the tone for the rest of his time in office.

Among the measures in the revised budget, which the lower house passed on Friday and the upper house is currently debating, are:

— scrapping of tax breaks on overtime

— a one-time extra wealth tax on people with more than €800,000 in assets

— scrapping of a law that would have raised the sales tax while decreasing employer contributions to the state benefit system

— a new tax on company dividends

— a new tax on stocks of petroleum products

— new taxes on some financial institutions and an increase in the financial transaction tax

Debate over the budget in the parliament last week was fierce as members of previous President Nicolas Sarkozy's conservative party fought in vain against a roll-back of much of what they had accomplished over the past five years. At one point, the session was even suspended so the deputies could cool down. The Senate is scheduled to vote on the budget on Friday; both houses are expected to approve a final version next week.

The new government claims the budget measures show that it is serious about reducing the country's deficit. It has already pledged to balance the country's budget by 2017. However, it did not back up the tax hikes with any significant cuts in government spending.

Companies say that the new taxes send out the wrong message: that France is closed for business.

A major part of the France's problem is that its $2.4 trillion economy is stagnant — the government expects just a 0.3 percent increase in gross domestic product this year. Growth is expected to pick up a bit next year — the government has predicted 1.2 percent growth, though others say that's optimistic. As growth has slowed, France's debt-to-GDP ratio has exploded, rising 30 percent since the crisis began to 89.2 percent this year.

So far, Hollande's push to cut the deficit appears to have been received well. Earlier this month, the country borrowed €6 billion in short-term debt at negative interest rates for the first time. Last week, a long-term debt auction also saw borrowing costs fall.

But analysts and business leaders say that chipping away at France's deficit by raising taxes is not a long-term plan. Creating incentives for businesses is going to have to be part of any strategy to restart growth. And new or higher taxes could have the opposite effect.

Guillaume de Fondaumiere, the co-CEO of video game company Quantic Dream which has 170 employees, said he and his fellow businessmen were growing weary of being France's boogeymen.

"We're not expecting medals but a minimum of consideration and help that would allow us to give our best," said de Fondaumiere.

One official from a CAC-40-listed company said the budget sent a message that the government doesn't like business and it doesn't like rich people. He would only speak candidly about the budget on condition of anonymity.

The French government hasn't been shy about saying that the budget bill is targeting the rich. This is an administration led by Hollande, who once famously said he did not like the rich.

Finance Minister Pierre Moscovici defended it in parliament as a law that "again puts justice at the heart of our tax system."

Justice is the watchword of Hollande's new team. His administration says it's committed to balancing the budget but that how they do it — by making the rich pay more and maintaining programs for the poor — will be just as important as that they're doing it.

Some had hoped Hollande would play on the Socialists' history of close connections with the country's powerful unions to reform a stagnant labor market — where both hiring and firing are expensive. Instead, the new budget paints a picture of an administration more concerned with protecting benefits like early retirement and generous unemployment insurance — measures that have defined French Socialism for decades.

"It's classic leftism," said Jean-Thomas Lesueur, a political analyst at the Institut Thomas More, a pro-market think tank based in Paris and Brussels.

There's one measure in particular — the repeal in a law that cuts the amount employers pay into the social security system — that has raised employers' hackles. The cost of hiring — and firing — in France is often blamed for the country's perennially high unemployment. In the past 20 years, the annual unemployment figure has never been less than 7.4 percent, according to national statistics. It has been over 10 percent, where it stands now, for most of the 1990s.

What was missing from the budget measures was any sign of real spending cuts. Such measures will have to wait until Hollande's administration writes the budget for 2013 this fall.

"This is a strong message to everyone ... that the government has not understood the urgency of reducing public expenditure," said Lesueur.

France has been spending more than it takes in revenue for a long time and the crisis over too much debt among the other members of the 17-country eurozone threatens to bring the problem to a head.

The country's borrowing rates have occasionally spiked sharply since last summer on fears that the country is not cutting its spending or reforming its labor market to encourage more growth.

"When the storm comes, I'm not sure if we'll have the means to react," Lesueur said.

While the government has yet to divulge its full strategy to right France's finances, it has promised to "reindustrialize" France — part of a grand plan to restart growth and keep manufacturing jobs in the country. Hollande has even created a Ministry for Industrial Recovery. Its first act will be to set about renegotiating a cost-cutting plan that would eliminate 8,000 jobs at carmaker Peugeot Citroen.

Companies across France are closely watching those talks as they wonder if they might next be in the government's sights — but also what kinds of incentives the government is offering to keep or create jobs. A grand plan to remake France as a center green vehicle production was unveiled on Wednesday as part of an effort to save the country's auto industry.

This highlights France's split personality: On the one hand, many companies will complain about a government threat to prevent profitable enterprises from laying off workers; on the other hand, they look to the state to prop them up in tough times.

"It's working less and less well," said Lesueur. "However, since we have made the French so accustomed to public spending, they're drugged."

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