France Announces New Taxes, Faces Slower Growth

Central (I-Newswire) August 29, 2011 - The government of France acknowledged Wednesday that the country’s economy is slowing and announced $16 billion in new taxes to ensure it reaches its deficit-reduction targets. The measures, including higher income taxes on high-wage earners and stiffer levies on alcohol, tobacco and soda, come as the country tries to safeguard its AAA credit rating — something considered critical to the stability of the 17-nation euro zone. The French government is to impose an extra tax of 3% on annual income above 500,000 euros (£440,000; $721,000). It is part of a package of measures to try to cut the country's deficit by 12bn euros over two years. The tax increase came after some of France's wealthiest people had called on the government to tackle its deficit by raising taxes on the rich.

Paris has reduced its economic growth forecast for 2012 to 1.75% from a previous 2.25%. Emergency programs put together for Greece, Ireland and Portugal — and potentially needed to help Spain and Italy — hinge on the region's stronger economies and their ability to borrow money at the lowest possible rates. As growth slackens, countries will find it harder to control the government deficits that have undermined confidence in the region. Yet the additional cuts and tax increases required to meet budget targets can slow growth even more.

French Prime Minister François Fillon also announced a partial reversal of a much-trumpeted 2007 law exempting workers and employers from taxes on overtime pay. He said the new tax would remain in place until France reduces its budget deficit back under the EU's intended limit of 3% of GDP, which should occur in 2013. France plans to trim its public deficit to 5.7 % this year, 4.6 % next year and 3% in 2013.

The International Monetary Fund’s most recent analysis of the French economy noted that among Europe’s AAA-rated countries, France had the greatest total outstanding debt, worth more than 80 percent of the country’s gross domestic product. Slower growth or missed budget targets could, within five years, put the figure close to 100 percent. The fund said France “cannot risk” such a path if it wants to maintain a credit rating that will help it underpin the euro zone economy. France is the second-largest economy in the euro zone, behind Germany, and is responsible for about 20 percent of the funding for the $600 billion rescue program set up for weaker euro zone nations. As France imposes the new austerity measures, Europe is suffering a steady stream of poor economic news. On Tuesday, Swiss banking giant UBS announced steep job cuts and Germany showed a sharp drop in a measure of the nation’s business confidence. Italy recently announced even deeper cuts than in France. Italy is the euro area’s largest debtor and is considered too large a nation to rescue if it runs into trouble.

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