Hollande Ready to Tackle Public Finances

François Hollande, fresh from his first full eurozone crisis summit, is set to turn his attention to the daunting challenge of tackling France’s own rocky public finances: with tax rises looming, it could be a tough week for French business and the better-off.

Francois Hollande, France's president, arrives for a news conference following the European Leaders (EU) summit at the European Council headquarters in Brussels, Belgium, on Thursday, May 24, 2012.
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Francois Hollande, France's president, arrives for a news conference following the European Leaders (EU) summit at the European Council headquarters in Brussels, Belgium, on Thursday, May 24, 2012.

The socialist president, just seven weeks into his five-year term, won a broadly positive reception at home for the outcome of the summit.

In contrast to his predecessor Nicolas Sarkozy, who stood shoulder to shoulder with Angela Merkel even when they disagreed on issues, Mr Hollande quietly but firmly urged on Mario Monti, the Italian prime minister, and Mariano Rajoy, the Spanish premier, as they insisted that the reluctant German chancellor back intervention by the euro zone's rescue funds to ease their countries’ borrowing costs.

Seeking relief for Italy and Spain was far from an altruistic gesture by Mr Hollande, however.

France’s 10-year borrowing costs, at under 3 per cent, are well below those of its Mediterranean neighbors. But figures last week from the Bank of France showed public debt grew by €72.4 billion in the first quarter to reach 89.3 per cent of gross domestic product. As analysts frequently remind the government, France could be next in the line of market fire if the eurozone sovereign debt inferno is not doused.

That is why this week is another big week for the new president.

On Monday, the Cour des Comptes, the independent state auditor, will lay out its assessment of the scale of the hole in the public finances that must be filled if France is to meet its commitments to reduce the budget deficit to 3 per cent of GDP next year and eliminate it by 2017.

On Tuesday, Jean-Marc Ayrault, the prime minister, will outline to parliament how the government intends to deal with the deficit and regenerate growth in a flagging economy that has lost competitiveness in recent years, especially compared with Germany.

Then on Wednesday, the government will spell out its supplementary budget for 2012, with savings of between €7 billion-€10 billion required to hit this year’s deficit target of 4.5 per cent.

Mr Ayrault, the prime minister, was quoted on Sunday in the newspaper Journal du Dimanche as saying: “It’s the moment to start the big structural reforms which France requires. We won’t wait three years to do it.”

But the Hollande government’s vision of structural reforms is not the same as that of the European Commission, the German government, Mr Hollande’s Italian and Spanish summit allies – or even the French business community.

First of all, it is planning a raft of tax increases aimed mainly at big companies and the wealthy as a primary means of closing the deficit: a 3 per cent tax on dividends, increased wealth and inheritance taxes, higher social charges on bonuses, a surcharge on petroleum stocks, extra taxes on banks – and a restoration of taxes on overtime – are all in the works.

The government has signalled that there will be a nominal freeze in significant chunks of public spending over the next three years – not an easy choice for a French socialist government, despite public spending in France amounting to 56 percent of GDP, one of the highest levels in Europe.

But Mr Hollande was at pains to explain at one of his Brussels press conferences that plans for heavy cuts in state jobs in some areas would be balanced by plans for 65,000 new hires over the next five years in education, justice and the security forces. Overall, state employment would remain stable, he said.

Mr Ayrault said structural reforms would cover “tax reform, the recovery of productivity, the reconstruction of our education and training system, the energy transition and decentralisation”.

The government is stressing the need to channel more of France’s high levels of private savings into industrial investment, especially for small and medium-sized companies, and to boost research and innovation. It is planning to tilt the corporate tax regime in favour of these areas.

But it has rebuffed the calls of the business community – and the European Commission – for direct action to reduce France’s very high labour costs and to liberalise still heavily regulated labour and product markets. Instead it has raised the minimum wage and ministers talk of toughening employment protection legislation.

Francois Fillon, prime minister under Mr Sarkozy, denounced the president’s policies as “irrational and counter to the direction of history”. But he was speaking as he announced his candidacy for the leadership of the UMP, the main centre-right opposition: the party will be tied up with that battle until November.