French companies are to get a €10bn ($15.5bn, £9bn) tax cut in one of the biggest structural reforms since Nicolas Sarkozy came to power two years ago.
The French government will announce on Wednesday the partial scrapping of the taxe professionnelle, a local business tax levied on fixed investment that has become a heavy burden, particularly for manufacturing companies, as part of next year’s budget.
The move has been welcomed by industry, which says it penalises investment. But scrapping the tax means delaying serious efforts to reduce France's spiralling public deficit even as the economy recovers.
The reform – described as a “competitiveness shock” by François Fillon, the prime minister, earlier this week – will cost €12bn next year and will be partially offset by the introduction of a carbon tax on road fuel and energy use that will cost companies €2bn.
In an extension of the stimulus package that shows the government is in no rush to withdraw its discretionary support for the economy, very small companies will, for a second year, benefit from reductions in social charges in return for hiring new staff.
Following a bigger-than-expected drop in corporate tax revenues, Mr Fillon revised up the government’s forecast for the public deficit from 7-7.5 per cent to 8.2 per cent. Mr Fillon said he hoped to stabilise it at that level in 2010, in part by scrapping 33,000 civil service jobs.
The budget is expected to give no indication of how the government intends to reduce the deficit in coming years beyond relying on the return of growth and of receipts, leaving it with a rapidly rising debt burden.
“Unless there are strong measures in 2011, we are going to be playing in the same schoolyard as Italy, Greece, Spain and Portugal,” said Laurence Boone, chief economist at Barclays Capital France.
Analysts said that whereas Germany had inserted a balanced budget commitment into its constitution and Spain had announced tax rises, France had provided no such reassurances.
Mr Sarkozy has, on the contrary, focused on further spending and borrowing. On Tuesday, the president earmarked a further €500m a year for young people. The under-25s will become eligible for a welfare-to-work benefit worth €450 a month, although only if they have already held a job for two years.
Mr Sarkozy’s latest flagship project is a national bond to finance long-term projects, such as a national optic fibre network for high-speed internet connections. But the lack of detail on the size and purposes of the bond scheme has added to perceptions that the president is no longer interested in fiscal discipline.
“If beyond this budget we have many billions of euros dedicated to so-called strategic expenditure, then I’ll be worried,” said Gilles Moëc, an economist at Deutsche Bank.
France’s projected deficit of 8.2 per cent in 2009 may not be as bad as that of some other countries, notably the UK, but its recession has also been less serious. The French economy is expected to contract by only 2.25 per cent this year – significantly less than most of its neighbours.
This situation reflects both the strengths of the French model and its weaknesses. On the one hand, it is a reflection of how well the so-called automatic stabilisers – lower revenues and higher welfare spending in a downturn – have cushioned the shock of the recession.
On the other, it is a reminder that France entered the crisis with one of the highest structural deficits in the eurozone, the result of years of fiscal ill-discipline and lack of reform.
Ms Boone pointed out that France had not run a primary surplus (after interest payments) since 1975 and that it would take a herculean effort for France now to comply with its European Union obligations of cutting its deficit to below 3 per cent by 2012.
