President Hollande's First Budget was the Easy One

In an effort to raise over €7 billion, French President François Hollande and his Prime Minister Jean-Marc Ayrault announced in their Budget on Thursday 05 July 2012, measures that included an increase in the tax rate from 50 per cent to 75 per cent for all income over €1 million - about £790,000 at the current exchange rate. The act of a Communist state by American and British standards but not the crucifixion scale that was demanded by the country's hard-Left. The Left Front and the New Anti-Capitalist Party during the recent General Election had advocated a confiscatory 100 per cent rate for such high incomes. It was also a disappointment to much of the left-wing media which accused the President of letting the "wealthy" off lightly.

Never mind, it was a start on France's road to a balanced Budget which President Hollande is determined to achieve by 2017 even though this piece of anti-rich reprisal has been criticised by many as window-dressing. Better off French people are no keener than their counterparts elsewhere to pay swingeing rates of tax, little surprise, so this alone is not expected to contribute more than two-three billion Euros to the French Treasury, although it should be a small fillip for the legal and accounting professions.

President Hollande in getting his "growth pact" agreed to by Chancellor Merkel at the Brussels Summit on 28/29 June must have noticed that the deal came with strings attached, even although it cost Germany little or nothing, for it obliges the signatories to rein in sovereign deficits and debt to GDP ratios amongst other promises, and all to be enshrined in each country's national law. Worse, with assurances given on the road to the Presidency to protect jobs, tackle France's 10 per cent unemployment rate, reverse the last Government's raising of the State Retirement Pension Age to 62 back to 60, create 60,000 teaching posts in the near future and review the minimum hourly wage, Mr Hollande had closed down many of his options even before entering the Elysée Palace.

If only to assuage Chancellor Merkel, at least on the Retirement reversal, a letter was apparently sent to Berlin explaining that this should prove inexpensive, as to qualify for the State Pension at 60 one must have paid full contributions from the age of 18, in other words for 42 years and few workers in France have been paying this full contribution before the age of 29. The rest of us might wonder what all those strikes were about when President Sarkozy was battling the legislation through the National Assembly!

Giving the President and his further-to-the-Left Prime Minister some relief and potential room for manoeuvre however, was a report from the Commission of Auditors on the outlook for the French economy. The report, which had been commissioned by President Hollande was published on 02 July. It lowered the projected figures for GDP growth - widely used during the Election campaign by the Socialists - from 0.5 per cent to 0.3 per cent for 2012. This is still better than the zero growth figure The Economist predicted late last year in their publication The World in 2012. Worse for 2013 though, is the Auditors expected fall from 1.7 per cent to 1.2 per cent

Even such a lacklustre increase was the good news when Prime Minister Ayrault delivered the real punch lines: between 2007 and 2011 France's National Debt had increased by €600 billion to nearly €1.8 trillion, close to 90 per cent of GDP and costing the French Treasury about €1 billion per week to service. This charge is the second-largest in the Budget.

Mr Ayrault stated that he would protect the working and middle classes and raise the extra revenues from the "rich" and big business. Therefore he has imposed a €1.1 billion special tax on banks and oil companies and a €2.3 billion wealth tax on richer households. This, no doubt, is the tax Tanya Powley in the Financial Times warned readers about on 07 July:

"James Johnston of law firm Bircham Dyson Bell warned that Britons who have retired to France and reside in the country for more than 50 per cent of the year, could pay up to 1.8 per cent of their wealth in tax per year: 'For them, any increase in in wealth tax would apply not just to property , but to all of their worldwide wealth..."

Ms Powley earlier in the article noted that, though not mentioned in Mr Hollande's Election manifesto, non-residents who own and rent out a property in France can expect to be taxed now at 35.5 per cent (up from 20 per cent) "applying to income earned since the beginning of the year" and should they sell the property, any gain on sales proceeds will be taxed at 34.5 per cent from August, currently 19 per cent.

Myriam Chauvot of French finance newspaper Les Echos quotes one source on 07 July as saying non-resident rentals will affect some 60,000 households receiving an annual average €12,000 per year in rental income, generating about €50 million in 2012 and €250 million from 2013 for the Government.

All this is still not enough though for President Hollande, who wants to reduce the deficit by €10 billion in 2012 and by €33 billion in Budget 2013. Pay cuts for many senior Government Ministers will be put in place - the President will take a cut of 30 per cent - and this will apply to leaders in the Nationalised industries. Where there is not a pay cut, pay freezes can be expected for most in the public sector and there will be little or no new recruitment - up to two-thirds of positions vacated due to retirement may not be replaced. Like Britain in 2010, all Ministries will have to submit new departmental budgets, initially for a seven per cent reduction in costs.

It won't be long before President Hollande will be able to exchange tales of political woe with Prime Minister Cameron, once that is after his Opposition get their act together. Such a great time to be in politics!