Tough austerity measures to target the rich and consumers

Prime Minister Francois Fillon has revealed new austerity measures for France. Photo by Marie-Lan Nguyen

Under the plan, a temporary three per cent tax will be levied from this year on all incomes above 500,000 euros. The tax would remain in place until France squeezes its budget deficit back under the EU's intended limit of 3% of GDP, which should occur in 2013. Meanwhile, social charges on capital income will be increased, and gains on property investments, including primary residences, will be taxed more heavily.

Companies will also carry some of the burden, with limited tax breaks for those incurring losses and added charges on overtime. The country’s main employer’s association, Medef, criticised the measures as ‘unbalanced’ and warned they would damage the competitiveness of French companies by increasing their costs.

Some of the wealthiest citizens in France may be less critical however, with the country’s richest having already publicly petitioned to be taxed more. A letter, published on the website of weekly magazine Le Nouvel Observateur and signed by 16 of France’s biggest CEOs, business leaders, and wealthy citizens, said "We are conscious of having benefited from a French system and a European environment that we are attached to, and which we hope to help maintain. At a time when rising public debt and deficits are threatening France's and Europe's future, and when the government is asking everyone to show solidarity, we feel we must contribute."

According to Fillon, 83 per cent of the impact of the austerity measures will fall on the rich and companies. The remainder will be felt by poorer citizens, with higher taxes on alcohol, tobacco, soft drinks and theme park tickets to be introduced. Supplementary health insurance policies are also to be taxed at a higher rate.

French President Nicolas Sarkozy ordered the austerity package two weeks ago amid rumours, eventually denied, that ratings agencies were about to strip France of its AAA credit rating. Experts had considered France’s growth projections of two per cent this year and 2.25 per cent the next, were too optimistic. Fillon’s new measures are based on new forecasts of 1.75 per cent for both 2011 and 2012. He says this package will allow France to trim its public deficit to 4.5 per cent by the end of next year. That’s 12 billion euros in spending cuts, tough austerity measures for a president facing re-election in eight short months.