August 24, 2011 / 1:16 PM / 8 years ago

France cuts growth outlook, slaps tax on rich

PARIS (Reuters) - France slashed its growth outlook and announced 12 billion euros (10.5 billion pounds) in extra budget savings this year and next, ranging from cuts in tax exemptions to a new levy on the wealthy, to shore up its prized ‘AAA’ credit rating.

France's Prime Minister Francois Fillon (R), accompanied by Social Cohesion Minister Roselyne Bachelot-Narquin (L), Budget Minister Valerie Pecresse (2nd L), Finance Minister Francois Baroin (C) and Health and Labour Minister Xavier Bertrand (2nd R), arrives to hold a news conference to unveil measures to achieve billions of euros in fiscal savings in Paris August 24, 2011. REUTERS/Patrick Kovarik/Pool

Prime Minister Francois Fillon said the government had cut its growth forecast for both 2011 and 2012 to 1.75 percent of gross domestic product, citing a darkening outlook for the global economy amid fears of mounting debts in Western states.

Economists had said that France’s over-optimistic growth forecasts of 2.0 percent for 2011 and 2.25 percent in 2012 were undermining the credibility of its fiscal policy.

Unveiling a package hurriedly stitched together in the wake of the U.S. credit downgrade this month, Fillon said the bulk of the savings would come from eliminating 5.9 billion euros in tax exemptions on everything from private health insurance to real estate capital gains and value-added tax on theme park tickets.

The government will gain another 2 billion euros in revenues from limiting French companies’ ability to write off losses against future tax as it seeks to harmonise its corporate tax system more closely with Germany’s.

Seeking to win over French voters angry at further belt tightening ahead of elections next year, Fillon announced the government would target the rich with a temporary 3 percent tax on households with revenues above 500,000 euros a year as it aims for a deficit target of 4.5 percent of GDP next year.

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

In total, the measures should bring in 1 billion euros in extra revenues in 2011 and a further 10 billion in 2012, when the government also aims to cut 1 billion euros from spending.

The tax on the rich, which is expected to raise some 200 million euros, will remain in place until France reaches its deficit goal of 3 percent, 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.

Economists said that unlike sweeping austerity packages in other euro zone countries like Greece, the measures were unlikely to slam the brakes on France’s teetering recovery.

“With the bulk of the effort being shouldered by large companies and high-income earners, this should not have a significant adverse impact on economic activity,” said BNP Paribas’ head of market economics Dominique Barbet.

SARKOZY FOCUSSED ON ELECTION

President Nicolas Sarkozy ordered his budget and finance ministers to come up with the new measures at an emergency government meeting this month, interrupting his summer holiday after a market meltdown demonstrated concern over French public finances in the wake of the U.S. downgrade.

Facing a tough battle for re-election in April, Sarkozy has sought to steer clear of painful spending cuts which might raise unemployment already running at just over 9 percent. “We have been careful to choose measures that reinforce fiscal and social justice,” Fillon said.

While the three main rating agencies have reaffirmed their stable outlooks on France, some economists remain sceptical.

“The latest French austerity measures might provide markets with some near-term comfort, but they are unlikely to prevent France losing its AAA credit rating in the end,” said Jennifer McKeown, senior European economist at Capital Economics, arguing the government’s growth forecasts remained overly-optimistic.

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 1.4 percent next year.

In a sign the French public is losing its traditional indifference to public finances, 54 percent of people said it was a serious problem that needed addressing even if that meant painful measures, according to an IFOP survey on Tuesday.

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.

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

“We believe the confirmation of France’s determination to meet fiscal targets should prove supportive, helping to dispel any doubts about the sustainability of France’s AAA rating,” Societe Generale’s chief France economist Michel Martinez said before Fillon made his announcement.

Additional reporting by Alexandria Sage; Editing by Catherine Bremer

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