France cuts growth forecasts, ups taxes on rich

Reuters: France cut its economic growth outlook on Wednesday and announced 12 billion euros in extra budget savings this year and next, ranging from cuts in tax exemptions to a new levy on the wealthy, to ensure it hits its deficit targets

.Prime Minister Francois Fillon said the government has cut its outlook for 2012 gross domestic product (GDP) growth to 1.75 percent from 2.25 percent. It has also trimmed its 2011 growth forecast to 1.75 from 2.0 percent.

Unveiling a hurriedly pulled-together package aimed at ensuring sluggish growth does not undermine France’s prized AAA-rating, Fillon said the government will seek a new, temporary, 3 percent tax on annual revenues above 500,000 euros as it aims for a deficit target of 4.5 percent of GDP next year.

“The reduction of our deficits ... is a sacrosanct goal,” Fillon told a news conference. “It is an economic obligation but also a social obligation because a country cannot live beyond its means forever.”

The tax should raise 200 million euros a year and will only remain in place until France reaches its deficit-reduction goal of 3 percent of GDP, currently targeted for 2013. The deficit stood at 7.1 percent of GDP in 2010 and the government has pledged to cut it to 5.7 percent this year.

The conservative government will also seek to modify a tax on real estate capital gains, he said, blaming debt mountains in the rich world for dragging on global growth.

In total, the government is eyeing 1 billion euros in extra revenues during the rest of 2011 and 10 billion euros in 2012, when it also aims to cut 1 billion euros from spending.

“This is a rigorous policy that will allow France to remain relaxed,” Fillon said. “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 revealed the level of concern over French public finances.

Facing a tough battle for re-election next April, 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,” Fillon said.

Sarkozy ordered the budget measures after French stocks were hit by rumours of a possible downgrade this month, following

Standard & Poor’s downgrade of the United States, and despite the fact the three main rating agencies reaffirmed their stable outlooks on France.

Focusing on raising taxes on the wealthy, as opposed to slashing spending, is a symbolic gesture that will sweeten the pill ahead of the scrapping of wider tax exemptions under a separate fiscal reform working its way through parliament.

Earlier this week, 16 of France’s wealthiest people said they wanted to do their bit for public finances by paying more taxes, though their leader Maurice Levy, the CEO of advertising giant Publicis, said any special tax should be temporary.

“I don’t want it to be only symbolic, I think it should be a real contribution,” he told Reuters.

More belt-tightening became inevitable after France’s 2 trillion euro economy stagnated in the second quarter, making it impossible to meet its deficit targets without further action.

After gloomy second-quarter data, economists warned growth could even dip below 1.5 percent next year.

Speculation France might lose its prized top credit rating hit the shares of French banks this month and drove the premium that investors demand to hold French debt instead of low-risk German bonds to a euro lifetime high of about 90 basis points.