France forced to cut budget again as election looms

PARIS (Reuters): France announced 65 billion euros of tax hikes and budget cuts over five years, as President Nicolas Sarkozy seeks to protect the country’s creditworthiness in financial markets without killing his chances of re-election in six months time.

 The main goal was to protect a top-notch credit rating that allows France to fund itself as cheaply as possible at a moment when the debt market crisis that started in Greece threatens to engulf far bigger fish such as Italy.

 But economists said the government’s growth outlook was still too optimistic, even after cutting the forecast for 2012 to 1 percent from 1.75, meaning the latest measures might not be enough for France to meet its deficit reduction goals.

 They also said that much of the plan would have to be carried out by a new government chosen in the election that takes place in two rounds next April and May.

 The second package of cutbacks in three months was left to

Prime Minister Francois Fillon to announce and included a rise in VAT sales tax and cuts in welfare benefit as well as heftier taxation of dividend income and, temporarily, corporate profit.

 Fillon said French public finances had been in the red for 30 years and the time had come to break with the damaging habit of spending more than it had.

 “Our country is going to pull up its sleeves,” Fillon told a news conference.

 “Europe’s supremacy of old is well and truly behind us.

Budget repair is as urgent as economic reform. We’ve got to pull out of this spiral of stagnation, excessive debt and poor competitiveness.” The plan was not short of measures that could dismay voters ahead of the presidential and parliamentary elections.

 The budget savings start in 2012 with measures worth 7 billion euros, and 11.6 billion the year after.

 The lower rate of value-added tax will rise to 7 percent from 5.5 for all but essentials, hitting restaurants and home repairs among others, while family allowances and housing benefit will be indexed at a much less favourable rate.

 Fillon also announced a temporary five percent increase in profit tax for firms with sales of more than 250 million euros a year, a similar rise in dividend tax, and heavier taxation of buy-to-let property investments as well as further rowback on tax breaks in other domains.

 The plan also involved speeding up the pace at which the retirement age rises to 62 from 60, getting there in 2017 instead of 2018 and creating extra savings as a consequence.

Securing the rise in the retirement age was a key political victory but highly unpopular move for Sarkozy last year.

 The steps could be make-or-break for Sarkozy as he tries to reassure jumpy financial markets and ratings agencies without upsetting voters and putting at risk a second five-year term in the 2012 election.

 Like other European countries, France is struggling to keep its public finances under control and contain its debt without triggering a sharp drop in consumer spending, a cornerstone of the economy, or sparking protests of the scale seen in other countries such as Greece.

 Ratings agencies have been hinting they could cut France’s prized triple-A credit rating because of slowing growth and its potential liability for the cost of bailouts in the European debt crisis.

 France aims to shrink its public deficit to 5.7 percent of

GDP this year and to 4.5 percent next year before hammering it down to the European benchmark of 3 percent of GDP in 2013 before a further push towards zero in 2016.

 “I don’t have faith in the (government’s) growth forecast of 1 percent next year and I think it will be closer to zero.

Therefore, there’s a risk that the government will have to have a second go (at belt-tightening) before long,” economist Bruno Cavalier at Oddo Securities said.

 “The government is facing the constraints imposed by the upcoming elections and the dilemma of how to stay in the same pack as Germany.

To keep France’s AAA credit rating, the government cannot stray from its efforts to bring the deficit in line with the (EU) limits.” While the cuts come at a politically sensitive moment for a leader whose popularity rating is low, Sarkozy’s Socialist adversary in next year’s election is also telling voters France’s public finances must be fixed and the government’s measures would prove insufficient.

 “We are going to have weaker growth and there will have to be other measures,” Francois Hollande told TV channel France 2.

“The situation is serious because the deficits are considerable.” Hollande, the favourite right now in opinion polls, said

part of the fix is to abolish all of the tax breaks Sarkozy provided since 2007, which he puts at 75 billion euros or a little more than the package announced on Monday.

 Fillon defended the package of measures as an act of political courage months from a presidential election necessary to keep France from succumbing to Europe’s debt crisis.