France hikes taxes to meet budget targets, Italy struggles

4th July 2012, Comments 0 comments

France's Socialist government hit big business and the rich with tax hikes on Wednesday to ensure the country meets its 2017 balanced budget target as eurozone growth flags and Italy struggles.

The new government said it would raise 13.3 billion euros ($16.7 billion) in extra taxes to meet commitments -- and campaign promises -- on cutting the public deficit and help ease the "crushing" burden of the debt.

In Rome meanwhile, German Chancellor Angela Merkel and Italian Prime Minister Mario Monti were to meet to follow up an EU summit last week, presented as a breakthrough in the debt crisis and which has calmed markets.

The French cabinet approved 7.2 billion euros in tax rises and 1.5 billion euros in spending cuts this year, two days after an audit warned the government it had to find up to 43 billion euros just to meet targets through to 2013.

Next year, tax increases will bring in an extra 6.1 billion euros.

The cabinet levied more taxes on big business, oil companies, banks and high earners, balanced with the more modest spending cuts, after the government won a vote of confidence for its programme in the national assembly on Tuesday.

The plan is to cut the share of public spending from 56.2 percent of Gross Domestic Product this year to 53.4 percent in 2017.

Meanwhile in Italy, official data put the first quarter public deficit at 8.0 percent of GDP, up from 7.0 percent a year earlier, largely because of a rise in borrowing costs.

Quarterly deficit figures in Italy vary widely, partly as a result of the country's schedule of tax collection.

Italy, labouring under a massive total debt burden, aims to cut its public deficit to 1.3 percent this year from 3.9 percent in 2011, and to 0.5 percent next year.

The latest Italian data comes after Monti pushed key labour reforms through parliament just before last week's EU summit, and then got Germany to accept extra help for troubled eurozone countries.

European stock markets were little changed on Wednesday, marking time after recent sharp gains while the euro was lower as investors waited for a European Central Bank meeting on Thursday when it is widely expected to cut its key interest rate from 1.0 percent.

The French measures, attacked as a cynical about-turn by the conservative opposition given President Francois Hollande's commitment to growth, also risks upsetting the government's own supporters on the left.

On Tuesday, Prime Minister Jean-Marc Ayrault called for national "mobilisation" to fight a "crushing" and "unprecedented" debt burden, blaming the previous government for adding hugely to the national debt.

The cost of interest on the debt is now the biggest item in the budget, with Ayrault putting the figure at nearly 50 billion euros per year.

France has run deficit budgets since the 1970s.

Ayrault said the French economy would grow by 0.3 percent this year instead of 0.5 percent, and only 1.2 percent next year instead of 1.7 percent as expected when the last government drafted its budget.

France has made commitments to the European Union to reduce the budget deficit from 5.2 percent of GDP last year to 4.5 percent this year, aiming to get down to the EU limit of 3.0 percent in 2013 and balance the budget in 2017.

At Berenberg Bank, senior economist Christian Schulz termed the growth assumptions optimistic and said the government was delaying "necessary spending cuts."

He said: "None of the policies announced by the new government so far address the serious structural problems France is facing."

The country "needs a more flexible labour market and significant shrinking of the public sector to unleash the great potential of the private sector and regain lost competitiveness," he said.

On Wednesday, the latest Markit PMI surveys, key leading indicators of economic trends, pointed down, and the data for France, while steadying, was in line with a contraction of the economy in the second quarter.

Another eurozone government, a new conservative-led coalition in Greece, is to soon present its programme, under pressure from the International Monetary Fund, European Union and European Central Bank to stick to its commitments made in return for their help.

Officials from the troika are to visit Greece shortly to see if the country is making enough progress on its budget and structural reforms to warrant the release of the next slice of bailout funds under a second rescue which also involved a huge private sector debt write-down.

The head of the European Commission task force in Greece, Horst Reichenbach said that the audit, a regular progress report, "is of utmost importance."

Greece needs new funds to pay its running costs in the next month and deputy Finance Minister Christos Staikouras said: "The economic situation is critical."

Prime Minister Antonis Samaras won the recent election with a strong commitment to meet the bailout terms but Greece is expected to try to renegotiate some of the conditions.

Eurozone finance ministers are due to meet on Monday to follow up last week's EU summit with talks on the details of the accords struck which provide for unprecedented direct aid for the banks, especially in Spain and possibly Ireland.

The summit also agreed that official rescue funds would not take precedence over private investors if the question of who would be reimbursed first arose.

European sources said Wednesday that the finance ministers will most likely meet again on July 20 to finalise the aid package for the Spanish banks.

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© 2012 AFP

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