France Unveils EU18.6 Billion Plan for 2012, 2013 to Save AAA

France's Prime Minister Francois Fillon
France's Prime Minister Francois Fillon. Photographer: Simon Dawson/Bloomberg

France unveiled tax increases and spending cuts amounting to 18.6 billion euros ($25.6 billion) for next year and 2013 to defend its triple-A rating as growth slows and Europe’s debt crisis deepens.

The country will increase some levies on large companies, push up the lower end of its range of value-added taxes and curb welfare spending, Prime Minister Francois Fillon said today.

“French people must roll up their sleeves,” Fillon said at a press conference in Paris. “We have one goal: to protect the French people from the severe difficulties faced by some European countries.”

The austerity plan is the second announced by President Nicolas Sarkozy’s government since August, when 11 billion euros of budget tightening for next year was set out. The latest round of measures, unveiled about six months before France’s presidential elections, comes after Moody’s Investors Service and Standard & Poor’s signaled that France’s AAA credit rating may be at risk.

“The first significant moves to present a leaner budget illustrate that real austerity is beginning in France,” said Pierre-Olivier Beffy, an Exane BNP Paribas economist in Paris.

The plan for a second round of budget cuts was flagged by Sarkozy in a televised address to the nation on Oct. 27. France has cut its growth forecast to about 1 percent next year from the 1.75 percent it previously predicted, hurting tax receipts. The government forecasts 2 percent growth in 2013.

The Measures

France’s commitment to reduce its deficit to 4.5 percent of gross domestic product in 2012 from this year’s estimated 5.7 percent is “untouchable,” Fillon said, meaning further cuts were required. France wants to shrink its deficit to 3 percent of GDP in 2013 and is aiming for a balanced budget in 2016.

The government expects the plan unveiled today to trim the budget deficit by 7 billion euros this year and 11.6 billion euros in 2013.

The value-added tax increase will raise 1.8 billion euros next year and the same amount in 2013. Scrapping indexation of income and wealth taxes will bring in 1.7 billion euros in 2012 and 3.4 billion euros in the following year.

Companies with revenue over 250 million euros will pay an additional level equal to 5 percent of their assessed tax, just for the fiscal years 2011 and 2012, a measure that will raise 1.1 billion euros in each of the two years.

Limiting increases in welfare spending will save 400 million euros next year and 500 million in 2013. Government cuts in health and welfare spending will save a further 1.2 billion euros in 2012 and will accelerate to 2.7 billion euros in the following years, Fillon said.

Salary Freeze

The government also said it plans to speed up an agreed to increase in the retirement age, with a rise of the minimum age to 62 from 60 now being completed in 2017 instead of 2018.

The government pledged to cut 500 million euros in state spending in 2012, a measure that includes freezing the salaries of Sarkozy and all his ministers until France’s budget is in balance. Fillon called on chief executives officers of France’s biggest companies to show similar restraint in their salaries.

“We can’t distribute the resources that we do not have,” he said today. “All our citizens are asked to face the demands of this plan.”

In a televised address on Oct. 27, Sarkozy blamed the two-year-long European sovereign debt crisis for France’s slowing growth and the need for budget cuts.

“It’s because of this debt crisis that we find ourselves in a situation of having to defend France’s triple-A,” he said. France’s debt as a percentage of economic output will be 87.6 percent this year, peaking at 90.3 percent in 2013, says the International Monetary Fund.

AAA Rating

French borrowing costs are climbing relative to Germany’s as contagion from the debt crisis spills over into the core economies of the euro region. The premium France pays over Germany to borrow for 10 years today hit 133.6 basis points, the highest since 1992 and up from 36.3 points at the end of last year. It was last at 129.5 points.

France’s Aaa credit rating is also under pressure from worsening debt metrics and the potential for additional liabilities from Europe’s sovereign crisis, Moody’s Investors Service said Oct. 17. France is among euro-area nations likely to be downgraded in a stressed economic scenario, Standard & Poor’s said Oct. 21.

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