Raffarin Faces Tough Choices To Accommodate Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

27 August 2003

French Prime Minister Jean Pierre Raffarin will finalise his plans for the 2004 budget this week, though a worsening economic situation and pressure from Brussels to balance the budget will make it difficult for him to deliver President Chirac's pledge to reduce income tax by one third, made in last year's election.

Chirac is said to want provision for a 3% cut in income tax in the 2004 budget to keep up the momentum following a 1% cut this year and a 5% cut last year. This would clip tax revenues by 1.5 billion euros and put further pressure on the country's already creaking public finances, now further strained by the fallout from this summer's heatwave which claimed the lives of over 10,000 mostly elderly French citizens and devastated agricultural yields.

Consequently, Chirac has promised 500 million euros in aid to French farmers who have stricken by drought, and more cash will be pumped into the healthcare system following the system's failure to cope with the casualties of the hot weather.

However, tax cuts are only likely to push the France further away from the 3% deficit to GDP ratio laid down by European stability pact rules, and the EU Commission estimates the deficit will hit 3.7% this year.

Some economists are also sceptical that income tax cuts will have the desired effect of boosting consumer spending, and recent reports suggest that the spending has indeed been muted in spite of the recent tax cuts.

"What's perhaps needed is a bit more precision in tax cuts," says Credit Lyonnais economist Herve Goulletquer, according to Reuters, adding, "for example focusing on corporate or labour taxes that could influence foreign investment and restart growth that way."

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