French socialist President François Hollande on Sunday set out his policy agenda for the next two years, announcing a series of austerity measures to rein in the country’s huge public debt burden while putting social justice reforms on the back burner.
"I'm not going to do in four months what my predecessors haven't done in five or ten years," said Hollande, whose opinion poll ratings have collapsed amid mounting unemployment and a stagnating economy, as he set out his programme in a live television interview, widely judged to be his most important public appearance since his election four months ago.
Maintaining his target of reducing the public deficit to 3% of Gross Domestic Product (GDP) by the end of next year, Hollande described the package of fiscal measures in the new public finances law, the 2013 public spending and fiscal programme to be put before the socialist-dominated parliament this autumn, as “the most important” budgetary reform in 30 years.
The law contains a raft of spending cuts, evaluated at 10 billion euros, and tax increases that will increase state revenue by 20 billion euros.
“I must set out the direction and the pace,” he said in the interview on French channel TF1. “The direction is that of recovery for France, [the pace] is a two-year agenda for recovery.” It was only after the success of this programme, underlined Hollande, that social reforms to create what he called a “society of solidarity” could be implemented. “I want to propose this agenda for recovery, two years, which will then become the agenda for a society of solidarity,” he said.
Referring to two “battles”, against unemployment and debt, the style and the tone of Hollande’s presentation of an ‘Agenda 2014’ was reminiscent of former German Social Democrat Chancellor Gerhard Schröder’s sweeping ‘Agenda 2010’ economic recovery plan launched in 2003.
But while Schröder’s reforms contained brutal cuts in the welfare system and a reduction in tax breaks, Hollande was keen to insist his 'agenda' remained anchored in a programme of the Left. Importantly, he reiterated his election promise to raise income tax on top earners to 75%, a reform that has caused major controversy and which, according to media reports last week, appeared set to be softened by raising the threshold from annual incomes of 1 million euros to 2 million euros, and allowing exonerations for certain professional categories.
Hollande said the tax would be applied to all those earning 1 million euros or more “without exceptions”, although the conditions include deductions of payments towards other taxes.
The latest economic growth forecast for France in 2013 sits at 0.8%, down from earlier predictions of 1.2%, and growth in 2012 is likely, said Hollande, to be little above zero. In July, the French national audit office, la Cour des comptes, estimated that some 33 billion euros needed to be raised, through spending cuts and new taxes, to meet Hollande’s objective of reducing public debt from the current 4.4% of GDP to 3% of GDP by December 2013. If 2013 growth is 0.5 percent, the auditors warned, 38.5 billion euros would be needed.
'We must call on patriotism in this period'
While the new public finances budget bill, Le projet de loi de finances pour 2013, which will begin its passage through parliament later this month, allows for a package of savings and tax hikes next year worth a total 30 billion euros, it will be topped up by further public spending savings already announced, including cost cuts in the health benefits system worth 2.5 billion euros.
Hollande insisted that a new and temporary tax level of 75% would be applied to annual incomes of more than 1 million euros, dismissing earlier reports that this could become a 2 million-euro threshold in the case of joint household income. Hollande also made clear that no professional categories, such as sports or arts, would be excluded from the tax, planned to be effective for at least two years and which Hollande estimated would affect between 2,000 and 3,000 people in all.
However, deductions of payments towards other taxes, such as the CSG and CRDS social contributions, are possible, allowing the tax ceiling to fall to 67%.
Enlargement : Illustration 2
The day before Hollande’s television appearance, it was revealed that Bernard Arnault, the French chairman and chief executive of luxury goods firm LVMH Moët Hennessy Louis Vuitton, and whose personal wealth is the largest in Europe, was applying for dual Belgian nationality. Amid muddled explanations from his company’s representatives, who said the move was to help in his investment plans in the country rather than to avoid French taxes, the French conservative UMP party jumped at the opportunity to denounce Hollande’s planned new 75% tax on top incomes, which former conservative prime minister François Fillon on Saturday called a “stupid decision”.
In the interview on Sunday, Holland said of Arnault: "He should have weighed up what asking for another nationality signifies, because we are proud to be French [...] We must call on patriotism in this period, when an effort is called for, when a recovery is required."
Hollande also announced an end to breaks on wealth tax, currently worth up to 24%, to bring wealth taxes in line with the progressive system applied to income. This move is calculated to be worth some 4.5 billion euros in extra revenue for the state.
He confirmed the reintroduction of tax and social security payments on overtime hours. Overtime work was exonerated from taxes and benefits contributions under a law introduced by Hollande’s predecessor Nicolas Sarkozy in 2007. However, Hollande said the breaks on social security contributions for overtime work would continue to apply to companies with a payroll of 20 or less.
The French president has also promised reform of labour market laws, and has called on unions and employers' organisations to find agreement on a plan that has the acrobatic goal of increasing job protection while relaxing hiring constraints. The government this summer speeded up the calendar for the consultations, and Hollande on Sunday warned that if no agreement was reached he would not hesitate to introduce legislation. "If this historic compromise can be reached at the end of the year, it will have the effect of law," he said. "But if the social partners don't find one, the state will assume its responsibilities."
Meanwhile, another reform expected for 2013 will reduce a company tax break that allows corporations to deduce the total lending costs on loans for takeovers or investment in other firms. While the precise plans remain unclear, French financial daily Les Echos reported that interest payments on such loans currently deductable in their entirety from company tax returns will now be deductable up to a maximum of 80% of their value for loans of less than 50 million euros.
-------------------------
English version: Graham Tearse