TAX NEWS - 2010

France Tax: France Can Balance Its Budget By 2020 At Latest

PARIS -- France should be able to bring its public finances into balance by 2020 at the latest, Budget Minister Francois Baroin said Sunday.

If economic growth does not rebound to 2.5% next year as the government hopes, further consolidation measures will be adopted to assure that the public deficit is cut from 8% of GDP to 6%, the minister said in a radio interview, hinting that a freeze on public sector salaries might be in the cards.

"Everyone must make an effort," Baroin insisted.

Until the deficit is reduced to 3% in 2013, fiscal policy will be adjusted to attain budget targets, he explained. A "little revolution" is underway in the management of French public finances.

In the past, governments had aimed to keep spending on target, allowing the deficit to fluctuate according to the phase of economic cycle.

Baroin said he expected "no bad surprises" this year on the revenue side, given the recovery in corporate tax receipts.

While 2.5% growth next year is "not unreachable," there will be "additional efforts" made in the 2011 budget to reach the 6% deficit target "if growth is not in line with our ambitions," he pledged.

Rather than hike taxes, the government's strategy to boost revenues is to reduce the level of fiscal incentives and tax write-offs that today amount to E70 billion. Nearly a third of these "fiscal niches" are no longer necessary, the minister argued.

Baroin said he had proposed a 10% cut across the board, with exceptions made for the "most fragile." He suggested for example that tax write-offs for employing domestic personnel be preserved for the handicapped and the elderly.

In this way, E5 billion in additional revenues could be recouped next year and a total of E10 billion over the coming three years, he estimated, suggesting that the target of E8.5 billion proposed Friday by Prime Minister Francois Fillon might not be enough.

On the spending side, some E10 billion in cuts for the next three years will be tabled in Cabinet next week on top of the E7 billion savings package already approved, Baroin said.

Among the outlays on the chopping block are 20% of the government's budget for communication, 10,000 cars for officials and 10% of the posts in the central administration, he said. After reducing the number of civil servants by 100,000 by replacing only half of those retiring, 100,000 more jobs will be eliminated by the end of 2012.

Baroin suggested that he would favor a freeze on the base pay of public employees after the 0.5% hike the government has committed to for July, arguing that private sector should not have to shoulder all the sacrifices. Pay increases for seniority and promotions would assure that public sector salaries do not decline in real terms, he claimed.

The reduction in the value-added tax for restaurants implemented last summer after years of negotiations with EU partners should also be revisited in light of the new consolidation strategy, the minister indicated, suggesting that a higher tax rate might be included in President Nicolas Sarkozy's campaign platform for re-election in 2012.

Once France has brought its deficit back below the EU's Stability Pact ceiling of 3% in 2013, fiscal consolidation could proceed at a more relaxed pace, Baroin suggested, proposing 2017 to 2020 as a target for eliminating the shortfall entirely. He backed Sarkozy's proposal for a constitutional amendment that would oblige each new prime minister to lay out at the beginning of his mandate a binding road map to achieve budget balance.

Like Fillon on Friday, Baroin defended Labor Minister Eric Woerth, who has been under attack from the political opposition in recent weeks for supposed negligence in pursuing a very wealthy French investor for tax evasion. The fact that Woerth's wife had been employed by the woman as a financial advisor has given critics additional ammunition.

In a separate radio interview on Sunday, Woerth repeated that his conduct had been above reproach, explaining that tax investigations are conducted independently by the French administration and that he was simply a convenient target for those aiming to sabotage the government's pension reform.

Woerth insisted that his role in steering the pension reform through further negotiations with trade unions and through the parliamentary debate next autumn had not been weakened by the attacks and that he was "more than ever" capable of assuring its ratification.

Whether or not the labor minister is able to withstand the mounting pressure, officials have made clear that there will be no back-pedaling on the primary component of the reform, which is to roll back the minimum retirement age by two years to 62.