French government's next tax grab may strain fragile recovery

Reuters News
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Posted: Aug 08, 2013 8:15 AM

By Leigh Thomas

PARIS (Reuters) - A growing chorus of French businesses and consumers is warning that government plans to wring 6 billion euros more in tax out of the economy next year risk stifling a fragile recovery and could damage future growth.

The International Monetary Fund also urged the government this week to slow the pace of its belt-tightening, mainly by scrapping plans for tax hikes in 2014, and instead take an extra year to bring its budget deficit within European Union limits.

The French tax burden is already one of the heaviest in the world. At 44.2 percent of GDP, it ranks behind only Denmark and Sweden among the 34 members of the Organisation for Economic Cooperation and Development.

Businesses in the euro zone's second-largest economy are particularly concerned about a prospective rise in payroll taxes as part of an overhaul of the pension system which the government hopes to thrash out by year-end.

Isabelle Graulier, who runs a small firm east of Paris that makes welding equipment, says she, her husband and daughter prefer to work extra at weekends rather than risk a higher tax bill by hiring more staff.

"We're sick of being taken for France's cash cows," she said. "Why would you want to hire someone? To pay more taxes? We've gone beyond the limits of what is acceptable."

Although President Francois Hollande has pledged to keep new tax rises to a minimum, his Socialist government is looking to raise at least 6 billion euros ($8 billion) in new revenues under the 2014 budget, due to go to parliament in September.

That will come on top of 30 billion euros in new taxes - equivalent to 1.5 percent of gross domestic product - imposed on the 2 trillion euro economy this year.

FEELING THE PINCH

Even without a new round of hikes, the strain is already being felt, as evidenced by data suggesting mothers are letting child-minders go after tax breaks were tightened in 2013 and a growing number of firms falling behind on payroll tax.

In its annual review of French economic policies, the IMF warned that companies and consumers were holding back spending crucial for the recovery on concerns taxes would keep rising.

"People are more than fed up. Something's going to blow sometime," Graulier said, predicting big losses for Hollande's Socialist Party in municipal elections early next year.

After the government scrapped tax breaks on overtime pay, she said many of her 20 staff say they are tempted for the first time to vote for the far-right National Front.

Jean-Pierre Cormier, head of a small precision machinery firm north of Paris, dismisses Hollande's promise to keep new taxes in check as "hot air" as he braces for a potential rise in payroll tax to fund the social security system. "Once again companies are going to have to pay up some more," he said.

With business having scarcely picked up since the 2009 financial crisis, the only kind words Cormier has for the tax authorities is that they are cutting slack for firms that fall behind on payroll and value-added sales tax (VAT).

The number of firms more than 90 days in arrears on their payroll tax is creeping back to levels seen during the crisis, according to figures from the ACOSS social security fund.

But business associations say some small firms seek help too late, which explains in part why the number of bankruptcies has returned almost to crisis-era records.

THE TAXMAN COMETH

Government critics like conservative Gilles Carrez, head of the finance committee in the lower house of parliament, point to such data as signs that "too much tax kills the tax base".

"The fiscal pressure has reached a dangerous point of declining returns from taxes," Carrez told Le Figaro daily.

The system's sheer complexity adds to the stress for consumers and businesses when dealing with the French taxman.

"I don't think there is much scope to increase taxes further, especially given the complexity and instability of the system as well as the distortions that it creates," OECD France economist Balazs Egert said.

The government has taken on board warnings that high labour taxes have made France uncompetitive and has introduced a tax credit proportional to companies' wage bills.

But that could be wiped out if the pension reform is financed by higher business taxes. "The idea that a big chunk of the funding could come from payroll tax is ludicrous," Deutsche Bank economist Gilles Moec said.

Other options for closing a pension shortfall of 20 billion euros by 2020 include raising income tax tied to social spending or value-added tax, already the state's biggest source of cash.

VAT is already set to rise next year to help finance the tax credit scheme for businesses and a further increase would hit voters' wallets when purchasing power is already stagnating.

The restaurant industry, already alarmed by weak demand this summer holidays, is dreading an imminent hike in VAT on meals.

"What's sure is that we'll have less business," said Pierre, 48, owner of a Paris cafe, with a shrug of resignation. ($1 = 0.7513 euros)

(Editing by Catherine Evans)