France announces austerity plan as growth slows

Prime Minister Francois Fillon revised the government\'s growth forecast for 2011 downwards to 1.75 percent from 2.0 percent, but said the measures would trim next year\'s public deficit to 4.5 percent of GDP.

"Our country cannot live beyond its means for ever," the centre-right premier announced, laying out supplementary budget proposals drawn up in response to the eurozone sovereign debt crisis.

Earlier this month world markets were rocked by rumours that France might be stripped of its top triple-A credit rating and that its banks were overexposed to the debts of weaker eurozone countries.

President Nicolas Sarkozy\'s government has insisted the French financial system is not at risk, but Fillon said France had passed the "debt tolerance threshold."

"It would be irresponsible to not take into account" the international economic situation, said the prime minister.

The public deficit, he said, "means lower growth, higher interest rates, and undeserved cost that is left for future generations to pay and, at the end of the day, it bogs down the economy."

Later on national television Fillon said he didn\'t have "any worries" about France\'s credit rating as the three top ratings agencies had indicated they had no plans for a downgrade.

Experts have long considered France\'s growth projections -- of two percent this year and 2.25 the next -- too optimistic, and Fillon\'s new measures were based on new forecasts of 1.75 percent both for this year and 2012.

Despite this slowdown, Fillon said his package would allow France to trim its public deficit to 4.5 percent by the end of next year. He has already vowed to hit the eurozone target of three percent by 2013.

To get there, he said France would cut one billion more euros than planned from public spending this year, and 11 billion in 2012, tough austerity measures despite Sarkozy\'s impending re-election battle in April.

In addition, a exceptional three percent tax will be slapped on incomes over 500,000 euros annually until the three percent deficit target is met.

Sixteen of France\'s richest people, including the heiress to the L\'Oreal cosmetics firm Liliane Bettencourt, issued a public letter saying they were willing to chip in to help stabilise the country\'s finances.

The measures were panned by the opposition parties. The leading Socialists complained that the measures would erode services and reduce purchasing power while belittling the "micro-tax for the mega-rich."

The CFDT labour union called the measures "unbalanced" while the FO said they put the country "under the guardianship of the markets."

However Fillon said that 83 percent of the impact of the austerity measures fall on the rich and companies.

But consumers will be hit as taxes will rise on tobacco, alcohol, sugared drinks and theme park tickets. Receipts will supplement the social security budget, which is in deep deficit.

Supplementary health insurance policies are also to be taxed at a higher rate.

A number of tax breaks are to be scaled back by a further 10 percent after having already been reduced.

However a key Sarkozy legislative initiative, reduced taxes on overtime hours, escaped untouched.

Fillon said the government would also move to harmonise its tax treatment of deferred losses by companies with that of neighbouring Germany.

During a summit last week, Sarkozy and German Chancellor Angela Merkel announced plans to harmonise their corporate tax rules.

France allows deferred losses to fully cancel out taxes due, and this is widely seen as favouring big companies that can handle the complicated accounting.

In Germany it is impossible for companies to fully offset taxes with deferred losses.

The country\'s main employer\'s association, Medef, also criticised the measures as "unbalanced" and warned they would damage the competitiveness of French companies by increasing their costs.

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