France's tough budget: Could this spark financial war?

French President Francois Hollande has revealed a tough first budget, with some saying financial war has been declared.

Story highlights

  • The French budget for 2013 has been heralded as the tightest since the Second World War
  • Hollande has said he would break the spiral of debt while safeguarding benefits
  • The new 45% income tax above 150,000 euros a year, this should raise 320 million euros
  • Hollande hopes his budget will cut public deficit by 3% of GDP next year

The announcement was carefully staged and the tone decidedly solemn. When French Prime Minister Jean-Marc Ayrault faced the cameras on Friday morning in Paris, at the Elysee Palace, to divulge President Francois Hollande's first budget, he appropriately talked of a "combat" budget.

The French daily newspaper Libération even commented that "a state of (financial) war had been declared." Having had to find an extra 30 billion euros, notably from the wealthiest taxpayers' pockets, the 2013 French budget has been heralded as the tightest since the Second World War.

France is not used to tightening its belt and this is perhaps precisely why the country is to face a national debt of 91.3% of GDP next year, and why it feels like war today.

Since his election in May, Hollande has repeatedly said that he would break the spiral of debt while safeguarding benefits for those who need it most. A delicate balance, to say the least.

For the last four months, France's budget minister, Jerome Cahuzac, has audited every ministry and interviewed every minister. He has asked every one of them to state their priorities and explain how they would finance them.

A pragmatist, he has carefully refused to discuss politics, and only focus on figures. His attitude didn't go down well with a few key government figures such as the culture minister Aurelie Filippetti.

Culture and the arts in France, a sacred domain always generously endowed, is facing, for the first time in decades, a 4.3% cut to its annual budget, which Filippetti eventually had to swallow.

How credible is France's new budget?

Indeed, the budget minister, "guillotine man" as some have nicknamed him, has won on all accounts. Apart from three key ministries, education, interior and justice, which have been spared, the French state is cutting its spending by 10 billion euros in 2013.

This is nothing short of a revolution for the second most prodigal state in the OECD countries group, after Denmark (France's public spending is indeed around 56% of GDP).

However, and this is how Hollande counteracts the argument from the left of the French left that his budget is in fact all about austerity, the other 20 billion euro savings in his budget will come from the wealthiest taxpayers with a string of new taxes.

It is interesting to note that the most controversial of his measures, which provided headlines all over the world, his famous 75% tax for the over one million euro incomes, will only reap 210 million euros. Only 2,000 to 3,000 French taxpayers are actually thought to be concerned by this new and highly symbolic tax which Hollande said would only be implemented for two years.

In fact, the lowering in the wealth tax's threshold should bring in almost five times as much. As for the new 45% tax on incomes above 150,000 euros a year, this should raise 320 million euros, while a new tax on share dividends will bring 2 billion euros.

As for taxing the business sector, Hollande has tried to spare small enterprises by focusing on big businesses but this has inevitably triggered the very vocal anger of France's entrepreneurs who accuse Hollande's government of being "anti-business."

France's 2013 budget may be a juggling act; however, Hollande's first budget certainly delivers on the president's promises to get the country's richest to fully contribute to the national effort.

French budget cuts in 2013

To the risk, as Sarkozy's party straight away argues, of making them flee to more rich-friendly neighbouring countries such as Belgium, Switzerland and Britain.

A few weeks ago, news that LVMH's mogul and Europe's richest man, Bernard Arnault, was seeking Belgian nationality, triggered accusations of betrayal from the French left and of vindication and "I told you so" comments from the French right.

Hollande hopes his budget will cut public deficit by 3% of GDP next year and that by 2015, structural deficit is simply eliminated. Now that the budget has been agreed, announced and is about to be implemented, the central issue is growth.

Can France rely on the International Monetary Fund's forecast of 0.8% growth next year? If, as some observers predict, there is no growth next year, Hollande will have to find another 15 billion euros. And this would really mean war.

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