Fillon outlines 12 billion austerity plan to cut deficit

France has unveiled a 12-billion-euro deficit cutting package that raises taxes on the rich and closes tax loopholes in an effort to calm jittery financial markets. Prime Minister Francois Fillon, who also revised the government's growth forecast for 2011 downwards to 1.75 per cent from 2.0 per cent, said the measures would trim next year's public deficit to 4.5 percent of GDP. 

Fillon announces new measures to cut deficit Reuters/Benoit Tessier

Experts have long considered that France's growth projections of two per cent this year and 2.25 the next were too optimistic. Fillon's measures were based on new forecasts of 1.75 per cent both for this year and 2012.

Earlier this month world markets were hit by rumours that France might be stripped of its top triple-A credit rating and that its banks were overexposed to the debts of weaker eurozone countries.

The government insists the French financial system is not at risk, but Fillon said France had passed the "debt tolerance threshold."

The prime minister stressed his package would allow France to reduce its public deficit to 4.5 per cent by the end of next year. He has already vowed to hit the eurozone target of three percent by 2013.

France is set to cut one billion more euros than planned from public spending this year, and 11 billion in 2012 despite President Nicolas Sarkozy's impending re-election battle in April.

In addition, a exceptional three per cent tax will be slapped on incomes over 500,000 euros annually until the three per cent deficit target is met.

On Tuesday, 16 of France's richest people, including the heiress to the L'Oreal cosmetics firm Liliane Bettencourt, issued a public letter saying they were
willing to chip in to help stabilise the country's finances.

Opposition parties have sharply criticised the new measures with the Socialist Party claiming they would erode services and reduce purchasing power while belittling the "micro-tax for the mega-rich."

The country's main employer's association, Medef, also criticised the measures as "unbalanced" and warned they would damage the competitiveness of French companies by increasing their costs.

In a surprise move, consumers will also feel the pinch with a rise in taxes on tobacco, alcohol, sugared drinks and theme park tickets. Receipts will supplement the social security budget, which is in deep deficit.

Supplementary health insurance policies are also to be taxed at a higher rate.

Fillon said the government would also move to harmonise its tax treatment of deferred losses by companies with that of neighbouring Germany.