France Raises Taxes on Wealthy, Companies to Narrow Budget Gap

France’s two-week-old Socialist government unveiled 7.2 billion euros ($9 billion) of tax increases to meet deficit-reduction goals and avoid bond-market punishment.

The 2012 measures, approved at a Cabinet meeting today, presage even larger tax increases and spending cuts next year in an economy that’s barely expanding.

The largest new levy will be a one-time surcharge on wealthy individuals’ assets to raise 2.3 billion euros. Another 898 million euros will be reaped by ending a payroll-tax holiday. Other steps include surcharges for oil and financial companies, each raising an additional 550 million euros, and a levy on dividends and stock options.

“We face an extremely difficult financial and economic situation,” Finance Minister Pierre Moscovici said at a press conference today in Paris. “The wealthiest households, the big companies, will be asked to contribute. In 2012 and 2013, the effort will be particularly large.”

France’s national auditor said July 2 that the government needs between 6 billion euros and 10 billion euros in savings this year to meet its 2012 target of a deficit equal to 4.5 percent of economic output. For next year, it needs to find 33 billion euros in savings to achieve its aim of 3 percent. President Francois Hollande has delayed the goal of a balanced budget to 2017 from the 2016 target set by previous president Nicolas Sarkozy.

France pays about 2.51 percent to borrow for 10 years, compared with 6.21 percent for Spain and 5.61 percent for Italy. The spread between French and German bond yields is at about 101 basis points, down from more than 140 points in mid-May.

Reverses Sarkozy

Today’s mid-year corrective budget reverses measures pushed through by Sarkozy. Sarkozy had cut wealth taxes, saying it would encourage wealthy French to stay home, and eliminated the payroll tax on overtime hours to boost purchasing power and circumvent the 35-hour work week.

Hollande has said the 2013 budget will restore the pre- Sarkozy wealth tax rates on people with assets of more than 1.3 million euros. A one-time contribution is being imposed this year ahead of an overhaul of the levy.

French companies with 250 million euros or more in revenue will be asked to pay a portion of their corporate taxes early. Companies will pay a 30 percent tax on stock options, up from 14 percent. Executives receiving the options will be levied at 10 percent, from 8 percent now.

Another Sarkozy measure being rolled back is that French residents abroad will be tested on their means before sending their children for free to French state schools.

Among the measures that will be in the 2013 budget will be a 75-percent tax rate for income of more than 1 million euros.

Spending Freeze

The government has signaled that spending cuts are also coming. For its 2013-2015 budget, it plans to reduce the number of civil-service jobs by 2.5 percent annually and reduce operating costs -- including car fleets -- by 10 percent next year, Le Figaro reported last month.

Prime Minister Jean-Marc Ayrault has issued orders to all ministries except education and justice to cut spending by 2.5 percent immediately.

Hollande cut salaries for himself and for ministers by a third at his first cabinet meeting, fulfilling an election promise. French ministers will now be paid 9,940 euros a month instead of the 14,200 euros under the previous president.

Moscovici said that that taxes as a percentage of economic output will rise to 46.5 percent in 2016 and 2017 from 43.9 percent last year. Government spending will be 56.2 percent of output this year, before declining every year to 53.4 percent in 2017. Government debt is estimated peak at 90.6 percent of the economy next year, declining to 79.6 percent in 2017.

The government’s budget is counting on the economy expanding 0.3 percent this year, 1.2 percent in 2013, and 2 to 2.5 percent annually from 2014 to 2017.