France raises taxes for top earners

President Francois Hollande's cabinet defended the spending plan for next year, saying it would win the 'battle' against joblessness (Reuters)

The French government is to introduce a 75% income tax rate for top earners as part of what it called a “fighting budget” to boost jobs and help growth.

But critics said it lacked fundamental reforms that could jumpstart economic growth.

President Francois Hollande's cabinet defended the spending plan for next year, saying it would win the "battle" against joblessness.

Like many European countries, France must tread a fine line between cutting the debts that dragged them into the financial crisis and investing in the economy to spur growth.

The French economy, the second largest among the 17 countries that use the euro, has not grown for three straight quarters, the national statistics agency confirmed today. Unemployment has been on the rise for more than a year and stands at 10.2%.

Economists warn, however, that things could get much worse in France if it does not get serious about slashing state spending and reforming stringent labour laws.

"This is a serious budget, it's a leftist budget and it's fighting budget," Finance Minister Pierre Moscovici told French radio.

Because Mr Hollande promised that he would slash the country's deficit to 3% next year - a limit required by European rules - the government must find 30 billion euro (£24bn) in savings. One-third will come in spending cuts, with the rest in new or higher taxes on the wealthy and big companies, including a 75% tax on incomes over one million euro (800,000).

Among the other measures included are: a new income tax level at 45% for those making more than 150,000 euro (£120,000), an increase of capital gains taxes to bring them more in line with how salaries are taxed, and a cap on certain deductions for large companies on their income taxes.

The 75% tax will last for two years and has always been billed as a symbolic measure since it will bring in very little revenue.

Several businessmen and politicians in the opposition have said that's exactly what's wrong with the 2013 budget: It sends the message that France doesn't like the rich and isn't open for business.

"France is sick from a model that isn't viable," said Guillaume Carou, CEO of Didaxis and president of the Club of Entrepreneurs, which represents 15,000 small businesses. "But (the government has) chosen to keep it, that's what the 2013 budget reveals."

Prime Minister Jean-Marc Ayrault rejected that characterisation, however, insisting that the budget would win the battle against unemployment.

"It's a budget that aims to inspire confidence and to break the debt spiral that keeps growing and growing," he said after the budget was presented to the Cabinet.

The budget is built around an expectation of 0.8% growth for next year. If growth misses the projections, more cuts could be needed later.

Mr Moscovici conceded that most economists predict the French economy will grow just 0.5%, but said that if the European debt crisis stabilises, France would meet its targets.