France forced to face the unthinkable: a tax on wine

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French public finances are in such a mess that the government is considering something that until now has been unthinkable - a tax on wine.

But the French government will not obey the budget deficit rules agreed by countries in the eurozone, the hard-pressed Prime Minister, Jean-Pierre Raffarin, has indicated.

M. Raffarin, who visits Britain on Thursday for an economic and social summit with Tony Blair, has infuriated Brussels, other member states and French Europhiles by saying, in effect, that eurozone rules should not apply to an important country such as France.

Countries belonging to the euro must limit their budget deficit to 3 per cent of its gross domestic product (GDP) - the total value of all goods and services. Paris estimates that its deficit this year will top 4 per cent of GDP. Grim deficit figures published yesterday suggest that public finances are out of control and that even this forecast is likely to be exceeded.

But M. Raffarin told French television that he intended to go ahead with a 3 per cent cut in income tax next year, without balancing spending cuts. He was "attentive" to the euro budget rules, he said, but they should not apply to a country with large, international commitments to defence and diplomacy, such as France.

Decisions on the economy should be made with French jobs in mind, he said, not to "balance the accounting books, and solve mathematical exercises, to satisfy someone in some office in some other country".

His comments - a challenge to the basis on which the euro was created - have drawn a stinging response from his political mentor, the former French president Valéry Giscard d'Estaing. At the weekend, M. Giscard accused M. Raffarin, his former lieutenant, of telling those "virtuous" eurozone countries that made painful efforts to obey the rules they should "pay for the faults" of those who refused.

Broadly the same message, sometimes in less polite language, has been communicated to Paris by other eurozone countries, and by the European Commission.

Paris, concerned about its public finances, is considering increased taxes on alcohol and tobacco next year - including a tax on wine. The proposed tax of €0.05 (about 3p) a bottle was met with protests from the wine industry, which is already suffering from the erosion of its markets abroad. Wine associations said yesterday the government had appeared to have dropped the plans to tax wine, but a spokeswoman for the government said nothing had been decided yet.

The proposals will be all the more hotly contested because M. Raffarin is proposing to cut income taxes next year, which will mostly benefit the wealthy.

The President, Jacques Chirac, and M. Raffarin say tax cuts, promised last year, will stimulate the economy and cut the deficit in the medium term.

But even conservative economists say income tax is not particularly high in France. The real tax burden comes from VAT, social security and charges on business.

M. Raffarin will meet Mr Blair at Chequers, his official country residence, to discuss, among other things, the new European Union constitution proposed by the convention chaired by M. Giscard.