July 8, 2012


Something's rotten in Paris : Moves by the new socialist government are setting the country up to become the next major victim of the European financial crisis. (Cyrus Sanati, 7/06/12, Fortune)

On Monday, an independent audit of the French economy, ordered by the new government, spooked the markets as it showed that France was on course to run a budget deficit equivalent to around 5.2% of its output, up sharply from earlier estimates. The budget gap grew after the new government announced plans to roll back a number unpopular austerity measures passed by the former conservative government. The deficit also expanded as the government finally got real about its economic situation, forcing it to adjust its overoptimistic economic growth forecasts. The government now projects the French economy will grow at 0.3% in 2012, down from the rosier 0.7%. They also lowered their 2013 forecast, projecting a 1.2% growth, down from 1.75%.

The Socialist Party ran on a platform that envisioned lowering France's budget deficit to zero by 2017. To do that, it would need to achieve a budget deficit equivalent of 4.5% of GDP in 2012 and 3% in 2013. Achieving those targets now with the revised data means that the government will need to cut spending or raise revenue in 2012 by an additional 6 billion to 10 billion euros than what they had originally anticipated. The gap is then expected to explode to as much as 33 billion euros in 2013.

To close the chasm in the budget, the government is focusing on the revenue side of the equation by imposing a number of one-time and permanent tax hikes. The new taxes will focus mainly on investors, large businesses and the wealthy. In its revised budget, the government is aiming to raise an additional 7.2 billion euros in taxes for 2012. This massive tax hike comes through a number of sources, including controversial plans to raise the national tax rate for the wealthy French citizens, which according to the French government is anyone pulling over 1 million euros a year, to an astounding 75%.

The government projects its new wealth tax will bring in an additional $2.3 billion to the nation's coffers. That is, of course, assuming that many "wealthy" Frenchman and businesses simply won't flee France to a more friendly tax jurisdiction. The European Union's law of free movement of peoples makes it easy to pack up and establish residency in a neighboring country to avoid higher taxation in their own country. It is unclear how many of Frenchmen will make an effort to avoid the new tax, but the French government was livid last month when David Cameron, the United Kingdom's Prime Minister, said he would, "roll out the red carpet," for French businesses seeking to essentially dodge the tax hike.

Posted by at July 8, 2012 6:06 AM

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