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President Francois Hollande’s new budget for 2013, his first since taking office in France, is relying on tax increases on the wealthy and on large companies to help cut the country’s deficit, rather than spending cuts. While cuts are still there, they take a back seat to closed loopholes and new levies.
Bloomberg reported Friday that the budget contains 20 billion euros ($26 billion) in tax increases, part of which is to come from a tax of 75% on incomes over 1 million euros, and from the elimination of limits on the wealth tax. It also includes a new tax rate of 45% on incomes above 150,000 euros. Spending has been cut in the new budget by 10 billion euros, which would lower the deficit to 3% of output. In 2012 it has been 4.5%. The budget also predicts that the French economy will grow 0.8%.
“It’s true we’re asking for an effort of the richest, the top 10% and the top 1% in particular,” Prime Minister Jean-Marc Ayrault said in the report. “Big companies of the CAC 40 pay less than the small companies and sometimes don’t pay at all. So we’re asking them for an effort too.”
After the budget announcement, French 10-year bonds saw their yield fall three basis points to 2.18%. The country has seen its borrowing costs fall since Hollande took office. However, unemployment is at a 13-year high and the French economy has failed to grow in four out of the last five quarters.
“This is the first big test of investor sentiment,” said Nicholas Spiro in the report. Spiro, managing director of Spiro Sovereign Strategy in London, added, “For the past four months the bond markets have given the Socialist government a free pass.”