France increases its taxes to avoid debt

FRENCH President Nicolas Sarkozy’s government has announced tax increases on the highest earners, capital gains, alcohol, tobacco, and sugared drinks to meet deficit targets and avoid the worst of the euro debt crisis.

Prime Minister Francois Fillon announced €12 billion of measures in 2011 and 2012 and cut economic growth forecasts, saying the euro region’s second-largest economy will expand by 1.75% in each year. He said France’s deficit would be 4.5% of gross domestic product in 2012, when Sarkozy seeks re-election, beating the target.

“We have passed the threshold of tolerance on debt,” Fillon told reporters at a briefing in Paris. Yet, “today’s policies are not emergency austerity measures.”

Sarkozy, like US President Barack Obama, must balance his re- election bid against the need to fix his nation’s finances. France, the second-biggest contributor to euro bailout funds, now pays a premium of 64 basis points over Germany to borrow for 10 years, up from 27 basis points when the rescue system was set up in May 2010. Both countries have the top credit rating.

Fillon repeated pledges to reduce the deficit, which reached 7.1% in 2010. It is targeted to drop to 5.7% this year and 3% by 2013. Debt will peak at 88 percent of GDP in 2013, the International Monetary Fund says.

Spending will be cut by €500 million this year and €1 billion in 2012, Fillon said, providing no details.

The reductions became urgent this month when speculation mounted that France’s top credit rating was vulnerable as the euro-area debt crisis crimped growth and the US was downgraded by Standard & Poor’s. Fillon cut forecasts of economic expansion from 2% this year and 2.25% in 2012.

The biggest revenue raiser would yield €2.2bn next year and €200m in 2011. The measure would cancel the capital-gains exemption from property sales, excluding the principal residence. A stricter inflation-based standard will be applied to the calculation.

Another €1.5bn will be generated next year, and €500m this year, by limiting companies’ ability to carry over losses as tax write-offs for one year. And €1.5bn in the next two years will come from a tax increase on capital gains.

An exceptional tax of 3% on those with incomes above €500,000 will generate about €200m next year.

The emphasis on what Fillon called “fairness” is “a necessary feature to avoid street protest, with higher taxes for both household and corporations,” Dominique Barbet, an economist at BNP Paribas in Paris, said in an interview.

The cost of cigarettes will rise by about 6% this year and again next year, yielding €700m. The imposition of a tax on sugared drinks will yield €100m. The tax on alcohol excludes wine, rum and local products.