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| Hollande’s New Budget Focuses on Cutting France’s Deficit | Hollande’s New Budget Focuses on Cutting France’s Deficit |
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| PARIS — President François Hollande, a Socialist who won election this year on a pro-growth platform, presented a budget on Friday that would produce the biggest cut in the public deficit in 30 years while raising the top rate for the wealthiest taxpayers to 75 percent from the current 41 percent. | |
| The budget, which will be presented to Parliament next month, is intended to bring France’s annual deficit to 3 percent of gross domestic product in 2013, down from 4.5 percent this year, in line with promises both to Brussels and to the markets. It places heavy emphasis on austerity measures, raising new revenues through increased corporate and personal taxes and freezing total government spending. | |
| Prime Minister Jean-Marc Ayrault on Friday called it “a combat budget for the recovery of the country.” But he insisted that the burden would fall mainly on corporations, already anxious about worsening French competitiveness, and on the relatively well off. He said that “90 percent of the French who pay income tax, with unchanged incomes, will not be taxed more.” | Prime Minister Jean-Marc Ayrault on Friday called it “a combat budget for the recovery of the country.” But he insisted that the burden would fall mainly on corporations, already anxious about worsening French competitiveness, and on the relatively well off. He said that “90 percent of the French who pay income tax, with unchanged incomes, will not be taxed more.” |
| Mr. Hollande made a point during his campaign that policies of undiluted “austerity” should be modified by a push for economic growth. He demanded the renegotiation of a European Union agreement to enshrine debt limits into the law and to punish governments that break mandated limits on annual budget deficits and cumulative debt. | Mr. Hollande made a point during his campaign that policies of undiluted “austerity” should be modified by a push for economic growth. He demanded the renegotiation of a European Union agreement to enshrine debt limits into the law and to punish governments that break mandated limits on annual budget deficits and cumulative debt. |
| In the end, he had to be satisfied with another, parallel and more modest agreement on growth. And in this budget, Mr. Hollande and his finance minister, Pierre Moscovici, are making it clear that France will stick to its promises of debt reduction, even with lower growth estimates, in order to keep the trust of the market that buys French bonds. | In the end, he had to be satisfied with another, parallel and more modest agreement on growth. And in this budget, Mr. Hollande and his finance minister, Pierre Moscovici, are making it clear that France will stick to its promises of debt reduction, even with lower growth estimates, in order to keep the trust of the market that buys French bonds. |
| They are doing so by raising taxes on corporations, the rich and the middle class and freezing public spending, though not cutting it. Spain and Italy have been under pressure from the markets, being forced to pay interest rates approaching 6 percent, but France has been treated as an exception, paying rates that are closer to Germany’s 1 percent to 2 percent than to Italy’s. | They are doing so by raising taxes on corporations, the rich and the middle class and freezing public spending, though not cutting it. Spain and Italy have been under pressure from the markets, being forced to pay interest rates approaching 6 percent, but France has been treated as an exception, paying rates that are closer to Germany’s 1 percent to 2 percent than to Italy’s. |
| The Hollande government, though internally divided about how to do it, intends to keep it that way, since the lower rates have meant a significant budget savings. Every 0.1 percent rise in French yields, Mr. Moscovici has said, costs France about $260 million annually, with a total debt projected to rise nonetheless to 91.3 percent of gross domestic product. | The Hollande government, though internally divided about how to do it, intends to keep it that way, since the lower rates have meant a significant budget savings. Every 0.1 percent rise in French yields, Mr. Moscovici has said, costs France about $260 million annually, with a total debt projected to rise nonetheless to 91.3 percent of gross domestic product. |
| Mr. Hollande has further promised to balance the budget by the end of his five-year term, but according to figures released today, will not make it. | Mr. Hollande has further promised to balance the budget by the end of his five-year term, but according to figures released today, will not make it. |
| After raising about $9 billion in new taxes and modest cuts this year, with France’s growth flat, Mr. Hollande had to find an additional $39 billion in this 2013 budget to hit the 3 percent goal. The total could go up if France’s growth, estimated at 0.8 percent of G.D.P. in 2013, continues to slip and unemployment, which has risen for 16 straight months and is now about 10 percent, continues to climb. Most analysts, including those at Barclays Research, forecast a lower growth rate of 0.5 percent or even 0.3 percent, which will mean that the government would miss the 3 percent target. | After raising about $9 billion in new taxes and modest cuts this year, with France’s growth flat, Mr. Hollande had to find an additional $39 billion in this 2013 budget to hit the 3 percent goal. The total could go up if France’s growth, estimated at 0.8 percent of G.D.P. in 2013, continues to slip and unemployment, which has risen for 16 straight months and is now about 10 percent, continues to climb. Most analysts, including those at Barclays Research, forecast a lower growth rate of 0.5 percent or even 0.3 percent, which will mean that the government would miss the 3 percent target. |
| Business and consumer confidence is down, and there is no indication that the crisis has peaked. The economy has had three consecutive quarters of zero growth, which will not be helped by the higher taxes Mr. Hollande is proposing. And Mr. Hollande’s personal popularity is down sharply in the four months since he narrowly beat Nicolas Sarkozy to become the first French Socialist president since François Mitterrand. | Business and consumer confidence is down, and there is no indication that the crisis has peaked. The economy has had three consecutive quarters of zero growth, which will not be helped by the higher taxes Mr. Hollande is proposing. And Mr. Hollande’s personal popularity is down sharply in the four months since he narrowly beat Nicolas Sarkozy to become the first French Socialist president since François Mitterrand. |
| Mr. Hollande’s problem is that in the middle of the euro crisis and flat growth, with pressure from Brussels and the markets, it is hard to live up to the hopes of his voters for the traditionally Socialist cure of higher public spending. | Mr. Hollande’s problem is that in the middle of the euro crisis and flat growth, with pressure from Brussels and the markets, it is hard to live up to the hopes of his voters for the traditionally Socialist cure of higher public spending. |
| Mr. Hollande’s budget finds the extra $39 billion by raising French taxes still further, upsetting businessmen and the middle class. Some $13 billion will come from new taxes on corporations and an additional $10 billion from new income taxes, including a new higher rate of 45 percent on incomes over $193,000 and a controversial, largely symbolic and supposedly temporary wealth tax of 75 percent on earnings of over $1.3 million. Those higher taxes, too, have been criticized by business leaders as a large disincentive for talented people to work in France, criticisms echoed by the opposition center-right parties. | |
| Under the new budget, normal tax brackets will not rise with inflation. Capital gains will be taxed like ordinary income and various tax breaks will be removed, including a limit on the wealth tax. | Under the new budget, normal tax brackets will not rise with inflation. Capital gains will be taxed like ordinary income and various tax breaks will be removed, including a limit on the wealth tax. |
| Another $13 billion is to come from a freeze in public spending, with ministries required to make some cuts to keep the overall state budget the same, adjusting for inflation. Some departments, like Defense, will take a major cut in order to provide more money to keep such campaign promises as the one to hire more teachers and police officers. | |
| By this method, Mr. Hollande has argued, France is avoiding austerity and its impact on ordinary people, instead putting the burden on corporations and those who can best afford it But critics like the economist Nicolas Baverez have argued that the Socialist government is simply putting off a day of reckoning with a bloated public sector that still accounts for 56 percent of G.D.P. | |
| “I don’t want a policy of austerity, hitting salaries, weakening the state and turning it into a pauper,” Mr. Moscovici said. He has said that more spending cuts will need to come in future years, especially to meet the goal of a balanced budget by 2017. But the government is counting on renewed growth to help shrink the deficit, presuming 2 percent growth in 2014, 2015 and 2016, which may be overly optimistic. | “I don’t want a policy of austerity, hitting salaries, weakening the state and turning it into a pauper,” Mr. Moscovici said. He has said that more spending cuts will need to come in future years, especially to meet the goal of a balanced budget by 2017. But the government is counting on renewed growth to help shrink the deficit, presuming 2 percent growth in 2014, 2015 and 2016, which may be overly optimistic. |
| Mr. Hollande campaigned on a budget savings to come half from new taxes and half from spending cuts. He is clearly frontloading the taxes, which may give him more leeway when and if growth picks up again. | Mr. Hollande campaigned on a budget savings to come half from new taxes and half from spending cuts. He is clearly frontloading the taxes, which may give him more leeway when and if growth picks up again. |
| The 3 percent goal is important, since Spain, even after the tough budget it announced on Thursday, foresees a deficit of 4.5 percent in 2012. The United States and Britain, by contrast, with their own central banks, will have projected deficits of 6.3 and 6.6 percent respectively. | The 3 percent goal is important, since Spain, even after the tough budget it announced on Thursday, foresees a deficit of 4.5 percent in 2012. The United States and Britain, by contrast, with their own central banks, will have projected deficits of 6.3 and 6.6 percent respectively. |
Scott Sayare contributed reporting. | Scott Sayare contributed reporting. |