France unveils a budget heavy on taxes

Associated Press
France's Prime Minister Jean-Marc Ayrault speaks to journalists after the weekly cabinet meeting at the Elysee Palace in Paris, Friday, Sept. 28, 2012. The French government aims to tackle the country's deficit and jumpstart its economy when it unveils its budget for next year on Friday. (AP Photo/Christophe Ena)
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PARIS (AP) — The French government presented a budget Friday that was heavy on taxes — including a controversial 75 percent income rate on high earners — but which critics said lacked fundamental reforms that could jumpstart economic growth.

President Francois Hollande's cabinet defended the spending plan for next year, calling it a "fighting budget" that would win the "battle" against joblessness and help growth.

Like many European countries, France must tread a fine line between cutting the debts that dragged them into the current financial crisis and investing in the economy to spur growth.

The French economy, the second largest among the 17 countries that use the euro, has not grown for three straight quarters, the national statistics agency confirmed Friday. Its gross domestic product stands at €1.8 trillion ($2.2 trillion). Unemployment has been on the rise for more than a year and stands at 10.2 percent.

Economists warn, however, that things could get much worse in France if it doesn't get serious about slashing state spending and reforming stringent labor laws.

"This is a serious budget, it's a leftist budget and it's fighting budget," Finance Minister Pierre Moscovici told French radio station Europe-1 Friday morning.

Because Hollande promised that he would slash the country's deficit to 3 percent of its GDP next year — a limit required by European rules — the government must find €30 billion in savings. One-third will come from spending cuts. The rest will come from new or higher taxes on the wealthy and big companies, including a new 75 percent tax on earned income that exceeds €1 million.

Among the other measures included are a new income tax level at 45 percent for those making more than €150,000 — the current top rate of tax is about 41 percent for income above €70,000. Also included in the budget is an increase of capital gains taxes, which start around 19 percent, to bring them more in line with how salaries are taxed, and a cap on certain deductions for large companies on their income taxes.

The 75 percent tax will last for two years and has always been billed as a symbolic measure since it will bring in very little revenue. Several businessmen and politicians in the opposition have said that's exactly what's wrong with the 2013 budget: It sends the message that France doesn't like the rich and isn't open for business.

"France is sick from a model that isn't viable," said Guillaume Carou, CEO of Didaxis and president of the Club of Entrepreneurs, which represents 15,000 small businesses. "But (the government has) chosen to keep it, that's what the 2013 budget reveals."

Prime Minister Jean-Marc Ayrault rejected that characterization, however, insisting that the budget would win the battle against unemployment.

"It's a budget that aims to inspire confidence and to break the debt spiral that keeps growing and growing," he said after the budget was presented to the Cabinet.

The budget is built around an expectation of 0.8 percent growth for next year. If growth misses the projections, more cuts could be needed later.

Moscovici conceded that most economists predict the French economy will grow just 0.5 percent, but said that if the European debt crisis stabilizes, France would meet its targets.

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