Paris gives 1996 budget premature airing

Under fire from left and right over its economic thinking (or lack of it), the French government has hurried to release details of next year's draft budget.

The government seems to want to reassure financial markets and party critics that it is carrying on with radical economic reform, despite the departure of Economics Minister Alain Madelin last month. With high unemployment and a surging budget deficit, it has a tough job ahead of it.

Details of tax changes were issued by the Prime Minister's office more than a week before the draft budget was due to be presented to the Cabinet and a month before the budget bill is expected to go before parliament.

The package has two main goals. One is to encourage people to make better use of money that is "doing nothing" - tied up in savings accounts of different kinds. The tax changes on savings (which will mostly not come into force until 1997) would reduce tax relief on life- insurance contributions, and cut the thresholds applied to the taxation of income from stocks and bonds, effectively increasing the amount of tax payable. It is also planned to curtail some of the tax exemptions that apply to investment income and increase state revenue from the wealth tax. The government also plans more favourable treatment for small businesses.

These measures are aimed at shifting cash away from savings, towards spending, and reinjecting some life into the economy. But they have to be set against a 2 per cent increase in the standard rate of VAT last month - which was attacked for discouraging spending.

Another goal is fiscal austerity. The government aims to reduce the domestic budget deficit from this year's projected 322bn francs (pounds 41.2bn) to 290bn francs next year, with a view to meeting the EU's requirements for joining a single European currency before 1999.

Among specific measures proposed for 1996 is a 20-centime increase in the price of petrol and diesel fuel (equivalent to a rise of 3 per cent for petrol and 5 per cent for diesel); and a 3 per cent rise in the price of cigarettes and tobacco - on top of the 6 per cent rise when VAT was raised.

There must be a question whether the details offered so far give anything like the whole picture. The tax-raising measures will not generate enough cash to close the gap. The government is still looking set to miss its targets for revenue for this year, and there may be more - and tougher - measures to come.

The government is also committed to keeping public spending down and has reiterated its intention, revealed last week, to impose a pay freeze on the public sector. One aim of the budget leaks may be to convince the unions that other people besides themselves will be hit.

All seven unions representing public sector employees have called a strike for the middle of next month in protest against the government's plan to freeze public-sector pay in 1996. Their leaders are to meet the minister responsible for the public sector in an attempt to find a solution. However, the Prime Minister, Alain Juppe, seems determined to stick to his guns.

Public sector pay accounts for almost 40 per cent of all public spending, but the government has to weigh the possibility that serious labour unrest could affect the value of the franc and upset budgetary calculations that way. "I am convinced that the public employees remain open to a rational analysis of the situation," Civil Service Minister Jean Puech said yesterday. "It is job-creation that is the essential goal."

Comments