- Associated Press - Sunday, July 29, 2012

PARIS — An amended budget for 2012 being pushed through the French parliament could provide an insight into President Francois Hollande’s new Socialist administration: The rich and large companies will be taxed before spending cuts are considered, and many of the big measures of the previous administration aimed at shaking up the country’s labor market look set to be swept away.

Business leaders are worried that the first major act as France’s new leader will set the tone for the rest of his time in office.

Among the measures in the revised budget, which the lower house passed Friday and the upper house is debating, are:

Scrapping tax breaks on overtime.

A one-time extra wealth tax on people with more than $980,000 in assets.

Scrapping a law that would have raised the sales tax while decreasing employer contributions to the state benefit system.

A new tax on company dividends.

A new tax on stocks of petroleum products.

New taxes on some financial institutions and an increase in the financial transaction tax.

Few spending cuts

Debate on the budget in Parliament was fierce as members of former President Nicolas Sarkozy’s conservative party fought in vain against a rollback of much of what they had accomplished over the past five years.

At one point, the session was suspended so the deputies could cool down. Both houses of parliament are expected to approve a final version this week.

The new government claims the budget measures show that it is serious about reducing the country’s deficit. It already has pledged to balance the budget by 2017.

However, it did not back up the tax increases with any significant cuts in government spending.

Companies say that the new taxes send the wrong message: that France is closed for business.

A major part of France’s problem is that its $2.4 trillion economy is stagnant. The government expects just a 0.3 percent increase in gross domestic product this year.

Growth is expected to pick up a bit next year. The government has predicted 1.2 percent growth, though others say that’s optimistic.

As growth has slowed, France’s debt-to-GDP ratio has exploded, rising 30 percent since the crisis began to 89.2 percent this year.

Taxing the rich

So far, Mr. Hollande’s push to cut the deficit appears to have been received well.

Earlier this month, the country borrowed $7.36 billion in short-term debt at negative interest rates for the first time. Recently, a long-term debt auction also saw borrowing costs fall.

But analysts and business leaders say that chipping away at France’s deficit by raising taxes is not a long-term plan. Creating incentives for businesses is going to have to be part of any strategy to restart growth.

And new or higher taxes could have the opposite effect.

Guillaume de Fondaumiere, the co-CEO of video game company Quantic Dream, which has 170 employees, said he and his fellow businessmen are growing weary of being France’s boogeymen.

“We’re not expecting medals but a minimum of consideration and help that would allow us to give our best,” Mr. de Fondaumiere said.

The French government hasn’t been shy about saying that the budget bill is targeting the rich. This is, after all, an administration led by Mr. Hollande, who once famously said he did not like the rich.

Finance Minister Pierre Moscovici defended it in parliament as a law that “again puts justice at the heart of our tax system.”

‘Classic leftism’

Justice is the watchword of Mr. Hollande’s new team. His administration says it’s committed to balancing the budget but that how they do it — by making the rich pay more and maintaining programs for the poor — will be just as important as that they’re doing it.

Some had hoped Mr. Hollande would play on the Socialists’ history of close connections with the country’s powerful unions to reform a stagnant labor market, where both hiring and firing are expensive.

Instead, the new budget paints a picture of an administration more concerned with protecting benefits such as early retirement and generous unemployment insurance — measures that have defined French socialism for decades.

“It’s classic leftism,” said Jean-Thomas Lesueur, a political analyst at the Institut Thomas More, a pro-market think tank based in Paris and Brussels.

There’s one measure in particular — the repeal of a law that cuts the amount employers pay into the social-security system — that has raised employers’ hackles.

The cost of hiring — and firing — in France is often blamed for the country’s perennially high unemployment. In the past 20 years, the annual unemployment figure has never been less than 7.4 percent, according to national statistics. It was more than 10 percent, where it stands now, for most of the 1990s.

What was missing from the budget measures was any sign of real spending cuts. Such measures will have to wait until the fall when Mr. Hollande’s administration writes the budget for 2013.

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