French Socialists eye tax rises after big poll win

By Reuters 19 June 2012

France's Socialists vowed on Monday to use a resounding victory in weekend parliamentary elections to pursue President Francois Hollande's drive for growth in Europe while sticking to promises to cut the budget deficit, mostly through taxation increases. By Daniel Flynn and Jean-Baptiste Vey.

Hollande will use a special session of parliament next month to whittle down France’s numerous tax exemptions and pass tax rises for large corporations, especially banks and energy firms, in a bid to cut the deficit to within the European Union’s 3 percent limit by next year despite a stagnant economy.
Economists expect the Socialist leader – who has also pledged a 75 percent tax rate on those earning over 1 million euros – to use an audit of the state’s finances due early next month to water down his campaign pledges to increase spending on welfare and education and justify tax rises.
Final results from Sunday’s election showed the Socialists won a comfortable majority of 314 seats in the 577-member National Assembly, freeing them from reliance on eurosceptic far-leftists opposed to more austerity measures.
Ahead of the vote, Hollande’s government had insisted it could meet its deficit targets with only minor cuts to administrative spending, without resorting to the kinds of austerity programmes seen in recession-striken Greece or Spain.
Appearing to brace French voters for tough measures, however, Interior Minister Manuel Valls said on Monday that meeting France’s EU commitments would involve sacrifices.
“We need to sort out this country. Every Frenchman will need to make an effort but fairly, via tax reforms. It will be difficult but that is the task facing us,” Valls told RTL radio.
France has one of the highest levels of government expenditure in Europe and posted a budget deficit of 5.2 percent of GDP last year.
Prime Minister Jean-Marc Ayrault is due to outline the government’s policy agenda to parliament on July 3, shortly after receiving the state auditor’s report.
Finance Minister Pierre Moscovici recently said the government was heading for a 5 percent deficit this year — requiring some 10 billion euros in additional measures over the to hit its 2012 target of 4.5 percent.
Economists said the Socialists’ parliamentary majority on Sunday – its best ever parliamentary score – would allow the party the room to impose tougher austerity measures and structural reforms if needed.
“These policies, which were not in the political program, would not be accepted by Communists members of parliament and by all Greens, but the support of the Socialists, who are much more faithful to the president, will now be enough,” wrote Dominique Barbet, economist at BNP Paribas in Paris.
A spokeswoman for the audit office said its report had been postponed until July 2-4 from an initial release date on June 28. That allows Hollande to postpone the domestically sensitive discussion of how to plug France’s deficit until after the June 28-29 EU summit at which he will press European leaders to back 120 billion euros of stimulus measures for euro zone economies.
Hollande was expected to press the case for the growth measures – which include joint bond issue to fund infrastructure projects and better use of EU structural funds – at a summit of G20 leaders in Mexico on Monday.
He travels to Rome on Friday to meet Italian Prime Minister Mario Monti, German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy and discuss closer political union and unified bank regulation in Europe, also on the EU summit agenda.
Amid rising tensions between Paris and Berlin, Merkel has rebuffed Hollande’s calls for joint euro zone bonds to resolve the crisis. She bluntly warned on Friday that France needed to urgently look to its own flagging competitiveness.
“The question everyone is asking is what will France do in terms of structural reforms and policies to stimulate growth, since there is a broad agreement that France has a serious competitiveness deficit,” said Jean Pisani-Ferry, director of the Bruegel think-tank in Brussels.
Many economists point to a sharp rise in wage costs over the last decade and the high level of welfare charges on salaries as the prime reason for France’s rising trade deficit, which hit a record 70 billion euros last year. They note that salaries in Germany, France’s main trade partner, have remained flat.
The Socialists, however, disagree. They say France’s economy needs more investment in research and education, and they have also pledged to set up a new investment bank to lend to small- and medium-sized companies, which create most jobs. DM

Photo: French President Francois Hollande attends a ceremony to mark the 72nd anniversary of General Charles de Gaulle’s appeal of June 18, 1940, at the Mont Valerien memorial in Suresnes, outside of Paris, June 18, 2012. REUTERS/Bob Edme


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