France is considering measures including slapping more tax on high earners, reducing housing tax breaks and cutting tax credits for corporations as part of a package to meet deficit targets in the face of weak growth. President Nicolas Sarkozy's government originally planned to raise an extra 3 billion euros next year by clamping down on tax breaks as it seeks to trim its 2012 deficit to 4.6 percent of gross domestic product from a forecast 5.7 percent this year.
But weak second-quarter economic growth figures and Standard & Poor's decision this month to downgrade the United States have convinced Paris it needs to act with more urgency to shore up its own AAA credit rating, seen as crucial for the stability of the euro zone as it wrestles with its debt crisis.
Government sources said that, unlike austerity packages in Spain and Italy, the adjustment focuses on raising revenues rather than slashing spending, which would be sensitive ahead of elections in April. While the details of the measures have not yet been finalised, the lion's share would take the form of trimming tax breaks rather than imposing new taxes.
"The additional adjustment will come from tax exemptions," said one government source. "In the longer term, particularly in 2013, we will have to find more savings on the spending side. We know that." Another official, who asked not to be identified, said the additional measures could be worth anything from 5 to 10 billion euros, in line with French media reports. In the 2011 budget, the government trimmed some 11 billion euros from tax exemptions.
Prime Minister Francois Fillon met Sarkozy on Tuesday to discuss initial proposals for the budgetary revisions drafted by Finance Minister Francois Baroin and Budget Minister Valerie Pecresse at an emergency weekend meeting. But sources said no announcement was expected before the first cabinet meeting after the summer break on August 24, about a month before the 2012 budget is due to be finalised.
A collapse in French markets last week amid rumours over the creditworthiness of its banks and the solidity of its 'AAA' rating sent shockwaves through the corridors of the finance ministry, on the banks of the river Seine. Officials had already been studying means of raising more revenue as they considered whether to cut next year's growth target of 2.25 percent, branded as optimistic by the International Monetary Fund. Second-quarter growth figures published on Friday showed France's economic growth ground to a halt in the second quarter, worse than expected.
Sources said there would be no reduction in tax breaks designed to reduce unemployment - which stood at 9.2 percent of the workforce in the first quarter - such as a special 5.5 percent rate of VAT for restaurants and hotels introduced by Sarkozy. "The efforts demanded of the French for the 2012 budget must be fairly distributed in terms of distribution between households and firms, and then in terms of big corporations and small- and medium-sized businesses," Pecresse said.
With a government committee studying how to impose more tax on very high earners, Pecresse said it had still not been decided whether to tax the companies paying the salaries or the households receiving them. A senior legislator from Sarkozy's UMP party has proposed cutting corporations' ability to write off losses against future tax by limiting this to just one year.
"There is some support in the government for measures aimed at big corporations," said one source. The source also said the government could reduce tax breaks on capital gains on housing, seeking to cool price rises in the sector which have aroused the concern of the IMF.
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