Moment of truth for Hollande as government unveils €30bn of increased taxes and spending cuts


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The Independent Online

An increasingly unpopular President Francois Hollande faces a moment of truth today when his government unveils €30bn of increased taxes and spending cuts in an attempt to honour France's deficit-cutting commitments for next year.

Against the background of resurgent crisis in the Eurozone, the finance minister, Pierre Moscovici, faces the thankless task of satisfying both the markets and fractious French public opinion that his 2013 budget can deliver Mr Hollande's campaign promise of “growth with discipline”.

With the French jobless total already smashing the 3,000,000 barrier this week and further, large-scale industrial redundancies threatening, France faces economic stagnation or recession next year.

The budget to be unveiled by Mr Moscovici today is based on a scaled down growth forecast of 0.8 per cent which already looks hugely optimistic.

The broad lines of the budget have already been revealed.

France will, in theory, meet the Eurozone target of a three per cent of GDP budget deficit next year by raising €20bn in new taxes and cutting €10bn from state spending. The share of GDP “spent” by the state will remain unchanged at 56 per cent.

The new taxes will include a “temporary” 75 per cent rate of income tax for marginal earnings over €1m and smaller tax increases for the moderately wealthy. Tax concessions awarded to big business and the well-off by former President Nicolas Sarkozy will be abolished.

The €10bn in spending cuts is less clear but there is to be a hiring freeze at all ministries save those responsible for justice, internal security and education. There will be new, state-funded job-creation schemes for the young.

Faced with a possible revolt on the Left, Mr Moscovici insists that this is not an “austerity” budget. When addressing the international markets, he says that it is biggest deficit correction attempted by any French government in three decades.

President Hollande already faces a split in his Socialist-Green coalition - and a rift within his own Socialist party - over his decision to approve an EU fiscal discipline pact which he criticised during the presidential campaign in the spring. He is accused of passivity on the Right and betrayal of his promise of a “new French dream” on the Left.

According to one recent poll by IFOP, his approval rating, which was in the mid-60s after his election in May, has slumped to 43 per cent.

President Hollande has asked to be judged on the “long-term” and has promised to “turn around” the rising curve of unemployment within 12 months.

Even moderate economic commentators say that the critical challenge facing France is to reduce the costs of labour - pay plus pay-roll taxes   which have increased by 28 per cent in ten years compared to eight per cent in Germany. They see little in today's budget to address this problem.