France Slaps 7B Euro Taxes On Rich And Big Firms

In the first major raft of economic measures since Francois Hollande was elected president in May promising to avoid the painful austerity seen elsewhere in Europe, the government singled out large companies and the rich.

An extraordinary levy of 2.3 billion euros ($2.90 billion) on wealthy households and 1.1 billion euros in one-off taxes on large banks and energy firms were central parts of an amended 2012 budget presented to parliament.

The law, which includes tax increases on stock options and dividends and the scrapping of an exemption on overtime, should easily receive approval by a July 31 deadline after the Socialists won a comfortable parliamentary majority at elections last month.

Hollande says the rich must pay their share as France battles to cut its public deficit from 5.2 percent of GDP last year to an EU limit of 3 percent in 2013 despite a stagnant economy and rising debt.

We are in an extremely difficult economic and financial situation, Finance Minister Pierre Moscovici told a news conference. In 2012 and 2013, the effort will be particularly large. The wealthiest households and big companies will have to contribute.

The budget followed a grim assessment of public finances on Monday by the state auditor, which warned that 6-10 billion euros of deficit cuts were needed in 2012 and a hefty 33 billion in 2013 for France to avoid a surge in public debt dragging it into the centre of the euro crisis.

One of the highest state spending levels in the world has raised France's debt by 800 billion euros in the last 10 years to 1.8 trillion - equivalent to 90 percent of GDP, the level at which economists say debt starts to hinder economic growth.

Budget Minister Jerome Cahuzac said that, while the initial focus this year was on tax rises for the wealthy, the government would progressively rein in its expenditure from 2013 onwards.

Cutting spending is like slowing down a supertanker: it takes time, he told Reuters.

Having promised to freeze central government spending without cutting staffing levels, Hollande will now face the difficult task of convincing France's powerful public sector unions to accept a cap on pay rises and promotions.

This is likely to figure on the agenda of a social conference next week with unions and employers.

I think the unions accept this idea of rigor, Civil Service Minister Marylise Lebranchu told RTL radio, insisting that the measures would not amount to draconian austerity.

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The Socialists accused the previous government of President Nicolas Sarkozy of deliberately overestimating economic growth and tax revenues by several billion euros to improve his chances in presidential elections in April and May.

Prime Minister Jean-Marc Ayrault on Tuesday slashed this year's official GDP growth forecast to 0.3 percent from a previous estimate of 0.7 percent, and to 1.2 percent in 2013 from 1.75 percent previously.

The amended budget eliminated a number of reforms introduced by Sarkozy, such as the tax exemption on overtime for companies with more than 20 employees. Scrapping that measure should raise 980 million euros this year, the Socialists said.

Repealing a law which shifted labor charges onto a rise in VAT sales tax will also have a net positive effect of 800 million euros, and a doubling of a tax on financial transactions to 0.2 percent will bring in 170 million euros.

There's a sharp break, politically and to a lesser extent economically, with Mr Sarkozy's more business-friendly fiscal policies, said Nicholas Spiro of Spiro Sovereign Strategy.

As long as there's no pressure on France's bond market, the government is unlikely to pursue the kind of product and labor market reforms which France requires.

France's 10-year bond yield was 2.5 percent on Wednesday, less than half the 6.4 percent yield of peripheral Spanish bonds, as investors continue to regard its debt as a safe haven.

The Medef employers union has already said that measures such as a new 3 percent tax to be paid by companies on dividends distributed to shareholders would strangle already weak profit margins. The Socialists say this levy is aimed at encouraging firms to use their cash flow for capital investment.

We are sorry to see an increase in corporate taxes at a time when they need to be lowered, as the only way to make our economy more competitive, said Medef chief Laurence Parisot.

Some 300,000 people are likely to be affected by the one-off rise in wealth tax on households with net worth of more than 1.3 million euros, which rolls back a tax shield on the rich introduced by Sarkozy, officials said.

The conservative UMP party said that measures such as the end of the overtime tax exemption would hurt ordinary French.

It is completely false to say that the tax increases will just hit the rich, said Gilles Carrez, president of the National Assembly's finance commission. The bulk of the new taxes will hit the middle class and today we have the proof.

($1 = 0.7933 euros)

(Additional reporting by Leigh Thomas, Catherine Bremer, Jean-Baptiste Vey; Editing by Catherine Bremer)