Lagarde Reveals Details Of France's 2011 Budget

by Ulrika Lomas, Tax-News.com, Brussels

17 September 2010

With only a matter of weeks to go before France’s 2011 finance bill is presented to the council of ministers, French Finance Minister Christine Lagarde has unveiled details of the fiscal measures that the government intends to introduce in its budget in order to reduce the country’s deficit to 6% next year.

Determined to reduce the public deficit from 8% this year to 6% in 2011, the government aims to reduce public spending by EUR40bn, Lagarde confirmed. According to the minister, a return to growth will automatically serve to generate EUR7bn for the government, while the abolition of various economic stimulus measures introduced in the 2010 budget will serve to save a further EUR16bn. A 5% cut in expenditure on state operating and intervention costs will enable the government to save around EUR7bn, Lagarde continued, noting that the remaining EUR10bn will be generated by reducing existing tax shelters.

Here, the minister reiterated the government’s intention to remove any tax breaks that are either no longer useful or proving increasingly costly for the state. By way of an example, Lagarde alluded to the government’s plans to tax “triple play” services (television, telephone and broadband Internet) at the standard value-added tax (VAT) rate of 19.6%. Currently, 50% of the bill for triple play subscribers is taxed at the reduced rate of 5.5%, while the remaining 50% is subject to the standard rate of 19.6%. Defending the government’s decision, Lagarde explained that, while the measure represented a total cost for the government of around EUR24m in 2006, costs this year are estimated at over EUR800m and are forecast at more than EUR1bn in 2011.

Confirming that the government does not intend to cut tax breaks that are considered vital for employment and job creation, Lagarde revealed her aim to maintain the tax credit available for research, explaining that research plays a determining role in innovation, and, consequently, in employment and the future of the country in the long-term.

Regarding the tax break currently enabling individuals in France to reduce their wealth tax (ISF) by investing in the capital of small- and medium-sized enterprises (SMEs), Lagarde emphasized the need to maintain this measure, stating that it is both an efficient tool and responds to a real need. A determined effort would be made, however, the minister noted, to clamp down on abuse of the measure. Lagarde also made known her intention to propose extending the measure to include innovating medium-sized enterprises (les entreprises de taille intermédiaire – ETI innovantes).

Underlining the fact that the government does not intend to abandon the principle of the tax shield, as it is right that individuals do not have to pay more than 50% of their income in tax, Lagarde admitted that the proposed 1% rise in the top rate of income tax (to 41%) and the proposed rise in the rates of tax levied on capital gains, interest, and dividends, would fall outside of the tax shield. It is understandable that the country’s top earners and that income from capital should contribute to financing pensions in France, Lagarde stressed.

Regarding fiscal convergence with Germany, Lagarde emphasized France’s intention to achieve convergence in the areas of both personal income tax and corporate tax.

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