France’s 2013 budget framework (1)

by Véronique Queffélec on septembre 17, 2012


After 4 month of presidency, Francois Hollande has reversed course from free spending egalitarianism to belt-tightening. Although members of the Government still try to avoid the word “austerity”, Francois Hollande laid out his policy on how he would cut the deficit by €30 billion during his televised speech Sunday night. A reform of how social security is financed is also on the Government’s agenda for 2013.

Having in mind that these €30 billion do not include some of the €5 billion revenues from the Amending Finance Law 2012 voted in July, neither the €2.5 billion savings from the reform on the health-insurance, the total effort will closely amount to €40 billion.

September 28 : France’s 2013 Finance Law

The France’s 2012 Finance Law will be put before Cabinet on the 28th of September. While €10 billion would be produced by spending cuts, another €10 billion would come from taxes on corporations, and the remaining €10 billion would be raised by taxing households, especially the most affluent ones.


→ The €10 billion in new taxes on households will fall mainly on high earners, with an “exceptional” 75% tax on earnings over €1 million, a measure likely to last two to three years. Note that this tax does not concern investments earnings and that the CSG and CRDS social charges would be included in the headline rate, suggesting the effective rate of income tax would be around 67%.

→ a new income tax rate of 45% for household revenues over €150,000 per year will also be introduced.

(This measure should bring €700 million to the State)

The upper limit of the advantages wealthy taxpayers used to benefits from various loopholes will be revised down to €10.000 per year (rather than €18.000 + 4% of the taxable income).
(This measure should bring €300 million to the State)

Employment revenues and investment earnings will be taxed at the same rate and there will be no inflation adjustment next year except for the two lowest tax brackets.
(This measure should bring €4.5 billion to the State)

→ Taxpayers who are subjected to the country’s solidarity tax on wealth (ISF) and who invest in SMEs will keep their fiscal reduction advantages (50% exoneration of income taxes), unlike Hollande announced in his campaign. Indeed, this measure could be costly in terms of competitiveness.

Also unlike the Government announced, real estate transaction earnings (secondary residences market) will not be taxed at the same rate as employment and investment revenues.


→ The promised reform of the corporate tax, with a modulating rate depending on the size of the company (35% for the largest, 30% for medium, and 15% for the smallest ones), should be referred to a “competitiveness package” expected by the end of the year.

→ the local tax relief for industries which spend on investment.

→ However, the total tax exemption of interest on corporate debt will doubtfully removed, as promised by the candidate Hollande during his campaign, but at least reduced by 20%.

→ Although some other advantages favoring large firms should be trimmed or canceled, it remains unclear at the moment how the €10 billion will be gathered at the end of next year.

=> Within a context of planned mass layoffs at firms like carmaker Peugeot PSA, retailer Carrefour and pharmaceutical group Sanofi, Finance Minister Pierre Moscovici last week told business leaders the Government was seeking an “intelligent” way to implement the tax without driving away investors.

Mindful of the tensions between employers and Unions, the Government is striving to please both parties at once, notably by excising from a roadmap published last week words like “flexibility” and “competitiveness” which unions despise.


→ For the Government to provide €10 billion to the equation, the savings will be found in all areas except education, the police and the judicial system.

→ Hollande said that he will hold the state spending steady in nominal terms next year, excluding debt servicing and pension payments.

→ Public employment and total outlays will be frozen.

Among other measures that are being discussed to balance the budget

→  a 6% tobacco tax increase, that would add up 40cts to the price of a pack of cigarettes.

a sharp increase in taxes on beer is also likely. The wost scenario would be an increase of 100% that would bring to the State an additional €300 million from the industry.

→ The project also included a tax on luxury hotel stays.

=> A structural and fiscal choc that could weight on growth

Les Echos polled France’s primary dealers (and other domestic economic research institutes) for their GDP growth forecasts in 2012 and 2013. The average of the 18 responses shows GDP growth of 0.1% in 2012 (Government’s 0.3%) and 0.3% in 2013 (Government’s 0.8%). For the budget deficit, the average suggests that target of 4.5% of GDP will be met in 2012, but that the budget deficit will only be reduced to 3.5% of GDP in 2013, missing the 3% target that the government is committed to achieving. Many economic experts hold pessimistic view on the likelihood of the government being successful in meeting its budget deficit target in 2013 (-3.8% of GDP).

October 10 :  France’s 2013 Social Security Financing Law

→ PM Ayrault has launched a discussion with the unions about how to finance social security, which weighs heavily on French labour costs. The reform will be presented on the 10th of October.

→ Running a social security deficit is abnormal according to audit office.

France’s Cour des Comptes, the State’s audit office, indicated on Thursday that the overall deficit of French social security stood at 0.6 percent of GDP in 2011, compared with a euro zone average of zero, and that it was essential that the deficit in the country’s welfare system is cut to zero over coming years.

At the presentation of the annual report on social security, Didier Migaud, head of the audit office,  noted that France risked “an infernal spiral of the social security deficit if new measures are not taken”, flagging possible savings in the transport of sick people and cutting tax breaks for pensioners.

The audit office estimates that the deficit for the body covering most private sector workers would reach €14.7 billion this year, down from €17.4 billion in 2011, still nearly €1 billion over the amount budgeted by the Government.

C) Hollande struggling with popularity

While loosing popularity among all social classes, French president believed that he would succeed in keeping the left behind him by framing the deficit cuts as being financed primarily by the wealthiest, but criticism is pouring from both political wings.

The leader of the Left Front Jean-Luc Melenchon, was quick to call the policy austerity. Nathalie Arthaud, spokesperson for the far left Workers Struggle, called the Sunday’s speech good news for the French industrialists.

Criticism also comes from the two major contenders for leadership of the center-right UMP. Party secretary Jean-Francois Cope said that he was “uneasy for France”, claiming that he had heard nothing in the address that was going to fix the country, while former Prime Minister and front-runner Francois Fillon accused Hollande of being a president who, under the cloak of being methodical, was trying to conceal the policy disarray : “In reality, in 2 years we will be in a situation much worse than today’s.”

Marine Le Pen, leader of the National Front, is mocking Hollande and claimed that both the president and his predecessor, Nicolas Sarkozy, were powerless, except that Sarkozy affected a “fired-up powerlessness” while Hollande had replaced it with a “limp powerlessness”.