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France Unveils A ‘Growth-Killer’ Budget For 2013

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Following closely on the heels of Spain’s budget and banking audit debacle, France prepares to unveil its budget (taxing business, bankers, and beer). The positive spin will be deafening as politicians are already proclaiming ‘realistic and ambitious’ growth targets as getting the country ‘back on the rails’. UnMondeLibre‘s Emmanuel Martin comments “How ironic? The French Presidential candidate who once campaigned with the slogan of ‘growth vs. austerity’ is now, as President, preparing to give the French the biggest taxation shock ever – a growth killer that is.” What matters is the type of path to fiscal responsibility, and, unfortunately, Mr Hollande chose ‘austerity with more taxes and no reform’. With France being a crucial player in the Euro-game, one wonders whether this might actually not mean the end of the Euro sooner.

 

Via Emmanuel Martin of Un Monde Libre,

France: A Growth-Killer Budget for 2013

How ironic. The French Presidential candidate who once campaigned with the slogan of “growth vs. austerity” is now, as President, preparing to give the French the biggest taxation shock ever – a growth killer that is.

France’s 2013 budget has been unveiled Friday and it is the “most important rigor effort in 30 years” according to… Mr. Hollande himself. Following his predecessor’s defense of the “golden rule”, the socialist President intends to reduce the deficit at 3% next year (vs. 4,5% in 2012) in order not to be “in the hand of markets”.

Of course market investors may be happy with the apparent “seriousness” of the socialist President. Of course Germany may be pleased to see that “Flamby” has finally come back to “reality” after his electoral pledges.

Except that reducing deficits is not the key to France’s problem per se: it depends on how the government performs it. Hence, behind the rhetoric of a “courageous, responsible” budget, or even a “budget of conquest”, the reality is that this budget is essentially based on tax increases (€24bn) – not spending cuts (€10bn). In a country with more than 56% of GDP in public spending and a public debt exploding at now nearly 90% of GDP,  a “responsible” government was expected to initiate a serious effort in terms of reforms to reduce the level of public spending first.

Yet, total tax pressure will rise from 44,9 to 46,3% of GDP whilst government spending will be “stabilized” at 56,3% of GDP. The revenues from income tax should rise by 25% (from €59bn to €73bn). A new income tax bracket is created above €150,000 with a 45% marginal taxation rate, with of course the famous 75% rate for incomes (from work only) above €1Mn. This steeper progressivity is not a good recipe for incentives to invest and create. A group of entrepreneurs called “the pigeon” (the pigeon means someone who pays for everyone – but that bird can also fly) has already planned demonstrations on October 7. Corporate tax revenues should increase by 30% at €52bn (especially from reductions in tax deductions in big companies). One hardly sees how France’s issues of high unemployment (that recently reached 10%) and lack of competitiveness due to high labor – social – costs will be helped by such policy (especially after the government last summer chose to reduce the retirement age to 60 for those who started to work at 18 – which is costly, and increased the national minimum wage).

Today the government maintains that most of the tax effort will be borne by rich households and big companies. This sounds like a “class struggle” vision, even if one now knows that to hit the rich is, in the end, to hit the poor – either because the rich will invest less or elsewhere. But, in fact, it turns out that, according to a Tax Administration Union, 16 million tax households (out of 36 million) will be hurt by income tax increase, given the freezing of the tax schedule. The cap of the tax reduction share per child is reduced from €2,300 to €2,000, which will hurt middle class families who pay income tax. The new taxation of capital gains and savings will penalize poor and middle class savers. Moreover, one measure taken this summer by the government has already reduced the purchasing power of the “workers”: the suppression of the non-taxation of overtime hours.

Government payroll is “frozen” at €80bn – not reduced. Even the budget cut of the “non-essential” Ministry of Culture is small (from €2,54bn to 2,43bn – a mere €110M… difference). Yes, 12,300 jobs will be suppressed in the various government departments. But 11,000 new public jobs will be created, and that’s on top of the nearly 6,800 already created this summer. The rule of non-replacement of retiring civil servants introduced by Mr Sarkozy was suppressed. Even when it is claimed that the government programs will be cut back (but the Prime Minister Jean-Marc Ayrault did not mention any during a TV show Thursday night), it’s hard to see where the €10bn will be found.

A recent NBER study by Alberto Alesina, Carlo Favero and Francesco Giavazzi finds that fiscal adjustments focused on spending are “associated with mild and short-lived recessions, in many cases with no recession at all” whilst “tax-based adjustments” are associated with “prolonged and deep recessions.” It’s high time that France seriously rationalizes its administration (by suppressing layers in its decentralized system, for eg. the Département – a layer of local government) and reduces its public spending. Mr Sarkozy was no doubt a big spender, and under his government debt increased by about 30% (which weakens the criticisms of the opposition today) but the effort to rationalize public spending was launched five years ago with the Revue générale des politiques publiques (a sort of cost-benefit analysis of France’s public policies to reform the government) and it was a good start. This new government seems to have dumped it.

Finally, let’s mention the – usual – optimistic assumption about growth next year. The government started with a 1.2% forecast, and then chose 0.8% for this 2013 budget. But economists predict 0.3%. The difference is not minor as 0,1% equals €1bn. As it’s obvious that such taxation shock will shrink the economy, one can only be stunned by the government growth forecasts for the next years : 2% !

After nearly forty years of budgets in deficit, France’s finally turning towards fiscal responsibility could have sounded like good news. But what matters is the type of path to fiscal responsibility, and, unfortunately, Mr Hollande chose “austerity with more taxes and no reform”. With France being a crucial player in the Euro-game, one wonders whether this might actually not mean the end of the Euro soon.


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