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EUROPEAN COMMISSION

Tax rises in France have reached a ‘critical level’

A top European finance chief has sent a message of warning to France that its tax rises have reached a “critical threshold” and called on the president to press ahead with vital structural reforms. However French economists have described the claim as 'ridiculous'.

Tax rises in France have reached a 'critical level'
France's Finance Ministry at Bercy and Olli Rehn vice-President of the European Commission who said French tax rises had reached a critical level. Photos: Bertrand Guay/Georges Gobet. AFP

Vice president of the European Commission Olli Rehn sent a clear message to France this week that it should think very carefully over any proposals to further raise taxes.

Just as the French environment minister mooted the introduction of a new “carbon tax” and Prime Minister Jean-Marc Ayrault sets out on a fraught process of pension reform Rehn told President François Hollande to steer away from yet more tax hikes.

Hollande has steered away from sweeping cuts so far and has not been scared to raise taxes, seen most notably in his proposal to levy a 75 percent tax on anyone earning over €1millon a year.

“Tax increases in France have reached critical levels,” Rehn told weekly newspaper Le Journal du Dimanche on Sunday. “Introducing new taxes could have the effect of stemming any growth and impact heavily on unemployment figures.

“Budgetary discipline must begin with a cut in public spending,” Rehn said.

The man who agreed to hand France a two year extension on its deadline to reduce its public deficit below agreed targets said Hollande’s France was on the right path but desperately needed to speed up.

“France is carrying out structural reforms that are in the right direction. But they do not go far enough and are not being implemented quickly enough.

“We granted France two more years to bring its deficit below the target of 3 percent of GDP in exchange for these reforms."

Rehn said the Commission was waiting to see the results of France’s reforms on three fronts. Firstly in terms of increased competitiveness, which he said was still too weak. Secondly in terms of an opening up of the service market, which remains protected by barriers and too much regulation and thirdly in the rail and energy industries which he says are monopolised by SNCF and EDF.

“France needs to be more daring just as in the reform of its pension system and continue to focus on the reduction of its structural deficits. It’s fiscal credibility and future depends on it,” Rehn claimed.

Rehn’s words however were given short shrift by some economists in Paris.

“It’s ridiculous to say France’s tax rises have reached a ‘critical level’,” Eric Heyer, from the French Economic Observatory told The Local. “There’s no study or report that has been carried out to back-up what he says.

“France’s taxes are high and it might not be best idea to raise them at this moment of time, but to suggest they have reached a critical level is wrong,” Heyer said. “Suggesting it will be a catastrophe if France introduces more tax hikes is just not true.

The economist also disagrees with Rehn’s view that France’s reforms do not go far enough and that they are not being implemented quickly enough.

“The reforms that are introduced progressively, over a number of years are the ones that have the best chance of succeeding,” he said.

Heyer was critical of the European Commission for demanding France reduce its deficits only through cuts in public spending.

“This is simply not a fair way to do it. Most public spending is on the social welfare system and the majority of the people who benefit from this service are the lower classes.

"The burden of tax rises will fall more on the rich people so the fairest way to reduce a deficit is through a combination of spending cuts and tax rises, so all sectors of the population play their part.”

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FRANCOIS HOLLANDE

France to miss public deficit target: EU

France will miss an agreed target to cut its public deficit, the EU said on Tuesday, with the latest economic forecasts saying that the French government deficit will hit 4.1 percent this year, 3.8 percent next year and still post a 2015 shortfall at 3.7 percent.

France to miss public deficit target: EU
French President Francois Hollande faces pressure from Brussels to meet the EU's 3.0-percent-of-GDP ceiling. Photo: Images of Money

With French output struggling to keep in line with the eurozone's core German economy, French President Francois Hollande faces pressure from Brussels to meet the EU's 3.0-percent-of-GDP ceiling.

But the latest economic forecasts from the European Commission say that the French government deficit will hit 4.1 percent this year, 3.8 percent next year and still post a 2015 shortfall at 3.7 percent.

The risk otherwise is that Paris could face new EU fines or an unprecedented intervention to France's national budget.

Meanwhile, Spain's battered economy is showing few signs of catching up recovery in the northern eurozone.

The European Commission forecasts left Spanish public finances looking perilously wide of the mark as it strives to emerge from a burst property-and-banking bubble, nine quarters in a row of recession and soaring unemployment.

Madrid has been given until 2016 to reach the 3.0-percent mark, after a eurozone bailout for its banks, but Spain's public deficit will still hit 5.9 percent next year and rise again to 6.6 percent in 2015.

The Commission said weak tax revenues will leave the public finances vulnerable in the absence of a major pick-up to put the economy back on track.

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