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Sarkozy Presents French Budget

by Ulrika Lomas,, Brussels

27 September 2007

Despite growing concern among France's eurozone partners over the state of its fiscal finances, President Nicolas Sarkozy has signaled his intention to forge ahead with his economic reform programme, which concentrates heavily on tax cuts rather than spending cuts.

Sarkozy's first budget as President, announced on Wednesday, includes some EUR9 billion in tax cuts already promised during the election campaign, and approved by parliament earlier this year.

These tax cuts are focused mainly on removing disincentives to work and invest. They include reductions in taxes on overtime worked beyond the 35 hour week, mortgage interest relief to encourage property investment, and the elimination of inheritance taxes for the majority of French property owners.

"France's economic problem is simple," Sarkozy declared. "We have discouraged hard work and we must encourage it."

The French government forecasts that the budget will shave 0.3% off of the country's tax burden, which will fall to 43.7% of GDP next year, from a planned 44% this year.

In a bid to recoup revenues, the budget proposes to allow an advance payment for a tax on dividends at a fixed rate on the year they are perceived. It is estimated that this would bring in an extra EUR1.3 billion to the welfare system and EUR600 million to the central government.

However, Sarkozy's budget will do little to quell the concerns of the guardians of the euro currency, who see France's deficit and debt levels as dangerous for stability, especially after Prime Minister Francois Fillon remarked recently that France was effectively "bankrupt".

The French budget deficit currently stands at 2.4% of GDP, below the maximum permitted by the EU growth and stability pact. However, its debt, which has recently risen to more than 64% of GDP, is one of the highest in the EU, and is above the 60% of GDP ceiling set by the European Commission.

Nonetheless, the prospect of a slap on the wrist by Brussels over the state of the French public finances does not seem to be weighing heavily on Sarkozy's mind, and he appears anxious to press ahead with restructuring France's tax and welfare system. New healthcare funding reforms are set to be proposed in the first half of next year, alongside new tax incentives to encourage long-term savings products.

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