France hits rich and business to slash deficit

PARIS Fri Sep 28, 2012 9:04pm IST

France's President Francois Hollande speaks during a news conference after his speech at the 67th United Nations General Assembly at the U.N. headquarters in New York September 25, 2012. REUTERS/Eduardo Munoz

France's President Francois Hollande speaks during a news conference after his speech at the 67th United Nations General Assembly at the U.N. headquarters in New York September 25, 2012.

Credit: Reuters/Eduardo Munoz

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PARIS (Reuters) - Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich on Friday in a 2013 budget aimed at showing France has the fiscal rigour to remain at the core of the euro zone.

The package aims to recoup 30 billion euros for the public purse with a goal of narrowing the deficit to 3.0 percent of national output next year from 4.5 percent this year - France's toughest single belt-tightening in 30 years.

But the budget dismayed business and pro-reform lobbyists by preferring tax hikes and a simple freeze of France's high public spending to attacking ministerial budgets as Spain did this week in its battle to avoid an international bailout.

With record unemployment and a barrage of data pointing to economic stagnation, there were also fears the deficit target will slip as France falls short of the modest 0.8 percent economic growth rate on which it is banking for next year.

"This is a fighting budget to get the country back on the rails," Prime Minister Jean-Marc Ayrault said, adding that the 0.8 percent growth target was "realistic and ambitious".

"It is a budget which aims to bring back confidence and to break this spiral of debt that gets bigger and bigger."

Hollande's aim is to achieve the savings without hitting the purchasing power of low-income families. But France's main employers' group said the measures would backfire by weakening the competitiveness of French industry.

"Its stated aim is to prepare the future. But the way it is put together holds it to ransom by putting investment and employment at a serious risk," Medef President Laurence Parisot said in a statement.

With public debt at a post-war record of 91 percent of the economy, the budget is vital to France's credibility not only among euro zone partners but also in markets which for now are allowing it to borrow at record-low yields around two percent.

The government said the budget was the first in a series of steps to bring its deficit down to 0.3 percent of GDP by 2017 - slightly missing an earlier target of a zero deficit by then.

France's benchmark 3.0 percent 10-year bond was steady, yielding 2.18 percent after the announcement but some analysts remained sceptical.

"The ambitions that were flagged are very audacious," said Philippe Waechter at Natixis Asset Management. "I struggle to see how we'll find the growth needed in 2013 and afterwards."

Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax rises already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.

EXODUS FEAR

To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75 percent super-tax rate for earnings over one million euros and a new 45 percent band for revenues over 150,000 euros.

Together, those two measures are predicted to bring in around half a billion euros. Higher tax rates on dividends and other investments, plus cuts to existing tax breaks are seen bringing in several billion more.

Jean-Paul Agon, chief executive of cosmetics giant L'Oreal, warned in the run-up to the budget that the new super-tax, which compares to a euro zone average top rate of 43 percent, will make it harder to attract top executives.

Bernard Arnault, France's richest man and chief executive of luxury group LVMH (LVMH.PA), created a storm this month by declaring he had applied for Belgian nationality - but stressed he would continue to pay taxes in France.

Business will face measures including a cut in the amount of loan interest which is tax-deductible and the cutting of an existing tax break on capital gains from certain share sales - moves worth around four billion and two billion euros each.

Growth vs euro zone graphic: link.reuters.com/nyh28s

French GDP by contribution: link.reuters.com/pyx28s

EU top income tax rates: htp://link.reuters.com/nac92t

Reuters Insider: French budget bashes business and whacks wealthy: link.reuters.com/hac92t

Four months after he defeated Nicolas Sarkozy, Hollande's approval ratings are in free-fall as many French feel he has been slow to get to grips with the economic slow-down and unemployment at a 10-year high and rising.

Finance Minister Pierre Moscovici defended next year's growth target on French radio. But, highlighting the bet on growth underpinning the entire budget, he added that it was achievable "if Europe steadies".

Data on Friday confirmed France posted zero growth in the second quarter, marking nine months of stagnation, as a pickup in business investment and government spending was offset by a worsening trade balance and sluggish consumer expenditure.

Despite a rise in wages, consumers - traditionally the motor of France's growth - increased their savings to 16.4 percent of income from 16.0 percent a year earlier. In another setback, other data showed consumer spending dropped 0.8 percent in August.

(Additional reporting by Catherine Bremer and Brian Love; writing by Mark John; editing by Philippa Fletcher)

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