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There are no easy solutions for France’s economic woes

Pressure is mounting for the recently elected French Socialist president, François Hollande and his government to address France’s sovereign debt, which is currently at a post-war record of 91%. France, the second-biggest economy in the Eurozone after Germany, is facing significant economic challenges. French public spending currently accounts for 56% of GDP in comparison to an OECD average of 43%. With persistent high unemployment of approx. 10% for over a decade, and with a stagnating economy over the past 9 months, French citizens are eager to see whether Mr. Hollande will stand by his 2012 electoral campaign promises.

The recent unveiling of France’s 2013 budget has prompted an economic polemic among politicians from both the left and right. As part of the budget, the Socialist government has introduced a 75% top tax rate on those earning more than 1million euros and a 45% tax rate for revenues of more than 150,000 euros. The former will affect around 30,000 French citizens (or 0.46% of the population). The government said that the budget was a first attempt to recover 30 million euros for the public purse.
The budget is intended to reduce the annual deficit from the current 4.5% to 3% in 2013 and to near zero by 2017. The budget places substantial emphasis on new revenue, such as an increase in corporate and personal taxes, while freezing total government spending.

François Hollande said that the budget aims at showing Europe that France has fiscal rigour to remain at the core of the Eurozone. He also stated that it was a simple case of “patriotism to accept to pay extra tax to get the country back on its feet again”. During a tour of France’s annual agricultural fair in Paris, he said: “It is sending out a signal, a message of social cohesion”.

Critics fear that the 75% tax rate could result in an exodus of entrepreneurs and of the wealthy overseas. However, French Prime Minister Jean-Marc Ayrault insisted it was “a fighting budget to get the country back on the rails”. He said “It’s true we’re asking for an effort of the richest, the top 10 per cent and the top one per cent in particular”.

Economists and analysts, however, said the “super tax” is more symbolic than effective, saying it would affect approx. 2,500 French households while adding little to state revenue. Thierry Pech, editor-in-chief of monthly Alternatives économiques magazine said, “From a strictly budgetary and economic point of view, the impact will be marginal, but Socialists expect a political effect … there is a deep resentment [by the public] against the ultra-rich, one that could feed populism”.

There is apprehension that the deficit target will slip as France falls short of the modest 0.8% economic growth rate target for next year. Amid these fears, French Socialist Prime Minister Jean-Marc Ayrault insisted that the 0.8% growth target for next year was “realistic and ambitious”. The chance of success has divided opinions: the government needs to find an additional 30 billion euros next year, and has chosen to divide this amount in two: one-third in spending cuts and two thirds in new taxes, half for businesses and half for individual tax payers.
Liberal economists criticise this division: they argue that state spending should have been cut much further with fewer new taxes in a country that is already one of the biggest taxers in Europe. They fear job creation will suffer as both business and consumers are forced to tighten their belts.

On the other hand, left-wing critics of the socialists such as the former presidential candidate Jean-Luc Mélénchon denounced any austerity package designed to satisfy financial markets and Europe’s liberal vision, which is not what Hollande promised the French in his campaign against Nicolas Sarkozy.

Amid these economic challenges, after nearly five months in power, François Hollande has suffered a massive drop in popularity. According to an Ifop opinion poll published in the Journal du Dimanche, the number of people unhappy with Hollande’s performance rose 11% in September to 56%.

Being at the start of his five-year term, it is critical for Mr Hollande and his Socialist government to act now. The Socialists currently hold power at all levels, from the Senate and the National Assembly down to local government. It is a formidable opportunity for the Socialist government to show French citizens and other European countries that it is capable of addressing France’s economic turmoil.