French budget heavy on taxes, could hurt Hollande

By Sarah Dilorenzo

Associated Press

Published: Friday, Sept. 28 2012 12:00 a.m. MDT

The budget shows the perverse way in which France has benefited from the debt crisis plaguing the eurozone. Because France has been considered a relatively safe haven among the mess, its borrowing rates are historically low and dropping. And the 2013 budget made use of that: The assumption is that the average interest rate for next year will be lower than the one for this year. That netted the government around €2 billion ($2.6 billion) — for nothing.

While the budget makes €10 billion ($12.9 billion) in cuts — in everything from administrative costs to the defense budget — it actually holds next year's spending even with this year's. The cuts were necessary because spending would have automatically increased because of salary hikes and inflation.

It also levies a series of taxes, mostly on the rich and big companies.

The most famous is a 75-percent tax on income earned over €1 million ($1.3 million). At the moment the current top rate of tax is 41 percent. The measure, which will run for two years, is largely symbolic — it would only hit a tiny number of people and barely make a dent in the deficit, bringing in an estimated €100 million to €300 million a year— but it has caused fears that the rich would flee France for friendly tax climates.

There are other measures that also hit the rich and large businesses, like increases in the capital gains taxes and a bigger bite for companies that distribute profits in dividends. Many voters see these as a good thing that the well-off take a disproportionate share of the tax burden.

Companies, however, complain that these measures penalize the very people who could reduce unemployment.

Prime Minister Jean-Marc Ayrault rejected that characterization, insisting that the budget would win the battle against unemployment.

"It's a budget that aims to inspire confidence and to break the debt spiral that keeps growing and growing," he said after it was presented to the Cabinet.

The budget is built around an expectation of 0.8 percent growth for next year. If growth misses the projections, more cuts could be needed later.

Moscovici conceded that most economists predict the French economy will grow just 0.5 percent, but said if the European debt crisis stabilizes, France would meet its targets.

Associated Press writer Angela Charlton and Sylvie Corbet contributed to this.

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