France’s Socialist government hit big business and the rich with tax hikes on Wednesday to ensure the country meets its 2017 balanced budget target as eurozone growth flags and Italy struggles.
The new government said it would raise 13.3 billion euros ($16.7 billion) in extra taxes to meet commitments - and campaign promises - on cutting the public deficit and help ease the “crushing” burden of the debt.
In Rome meanwhile, German Chancellor Angela Merkel and Italian Prime Minister Mario Monti meet to follow up an EU summit last week, presented as a breakthrough in the debt crisis and which has calmed markets.
Italy’s public deficit will be 2.0 per cent of gross domestic product (GDP) this year, Prime Minister Mario Monti said on Wednesday, considerably worse than the previous estimate of 1.3 per cent.
“Italy will have a deficit of around 2.0 per cent this year,” Monti said following talks with Angela Merkel. The deficit was 3.9 per cent in 2011 and Italy aims to cut it to 0.5 per cent next year.
The French cabinet approved 7.2 billion euros in tax rises and 1.5 billion euros in spending cuts this year, two days after an audit warned the government it had to find up to 43 billion euros just to meet targets through to 2013. Next year, tax increases will bring in an extra 6.1 billion euros.
The cabinet levied more taxes on big business, oil companies, banks and high earners, balanced with the more modest spending cuts, after the government won a vote of confidence for its programme in the national assembly on Tuesday.
The plan is to cut the share of public spending from 56.2 per cent of Gross Domestic Product this year to 53.4 per cent in 2017.
Meanwhile in Italy, official data put the first quarter public deficit at 8.0 per cent of GDP, up from 7.0 per cent a year earlier, largely because of a rise in borrowing costs.
Quarterly deficit figures in Italy vary widely, partly as a result of the country’s schedule of tax collection.
Italy, labouring under a massive total debt burden, aims to cut its public deficit to 1.3 per cent this year from 3.9 per cent in 2011, and to 0.5 per cent next year.
The latest Italian data comes after Monti pushed key labour reforms through parliament just before last week’s EU summit, and then got Germany to accept extra help for troubled eurozone countries.
The French measures, attacked as a cynical about-turn by the conservative opposition given President Francois Hollande’s commitment to growth, also risks upsetting the government’s own supporters on the left.
On Tuesday, Prime Minister Jean-Marc Ayrault called for national “mobilisation” to fight a “crushing” and “unprecedented” debt burden, blaming the previous government for adding hugely to the national debt.
The cost of interest on the debt is now the biggest item in the budget, with Ayrault putting the figure at nearly 50 billion euros per year.
France has run deficit budgets since the 1970s.
Ayrault said the French economy would grow by 0.3 per cent this year instead of 0.5 per cent, and only 1.2 per cent next year instead of 1.7 per cent as expected when the last government drafted its budget.
France has made commitments to the European Union to reduce the budget deficit from 5.2 per cent of GDP last year to 4.5 per cent this year, aiming to get down to the EU limit of 3.0 per cent in 2013 and balance the budget in 2017.
At Berenberg Bank, senior economist Christian Schulz termed the growth assumptions optimistic and said the government was delaying “necessary spending cuts.” He said: “None of the policies announced by the new government so far address the serious structural problems France is facing.” The country “needs a more flexible labour market and significant shrinking of the public sector to unleash the great potential of the private sector and regain lost competitiveness,” he said.