France Levying Surtax on Big Business to Help Close Deficit

In its most important decision since taking office last month, France’s left-wing government announced Monday that it will slap new tax surcharges on big business to help plug a widening budget deficit and qualify for the single European currency next year.

Under the $5.3-billion deficit-reduction package, government spending will also be cut by $1.7 billion, including the reduction of $330 million in credits earmarked for the Ministry of Defense.

“This is quite good news for European monetary union,” Joanne Perez, economist at Merrill Lynch in Paris, said. “It allows France to say that . . . it is continuing a legitimate effort to meet the monetary target.”

Germany, Europe’s economic powerhouse, has been insisting that countries shrink their deficits this year to the previously agreed-upon level of 3% of gross domestic product in order to join the new euro currency, which is to be launched in 1999.

Differences over how closely this criterion must be met have led to damaging quarrels between France and Germany, the twin locomotives of continental integration. On Monday, however, German Finance Minister Theo Waigel signaled his contentment with the French government’s latest efforts.

French officials predicted that the mix of new, temporary taxes and reduced expenditure would shave four-tenths of a percentage point off the 1997 deficit, which Christian Sautter, secretary of state for the budget, said was now running at between 3.5% and 3.7% of GDP.

“We will be at the rendezvous of 1998 in the same conditions as our partners,” said Finance Minister Dominique Strauss-Kahn, who unveiled the new measures at a news conference. In 1998, the first wave of countries qualifying for the euro is supposed to be chosen.

For large companies such as Michelin, Pechiney and other French business leaders with an $8.3 million or greater yearly revenue, taxes will go up 15% in 1997-98, hiking the effective rate from 36.6% to 42%. In 1999, the surcharge will drop to 10%.

“It’s quite carefully formulated, this tax increase, so it doesn’t affect small companies, which tend to be the creators of new jobs,” Perez commented. Small businesses make up 80% of the total but make only 32% of the profits.

Though domestic growth has been running at only a 2.3% annual rate, many large French companies have seen profits rise handsomely because of a boomlet in exports, recently aided by the surge in value of the U.S. dollar.

The new taxes are supposed to raise $3.6 billion this year.

The government of Socialist Prime Minister Lionel Jospin, faced with post-1945 record unemployment of 12.8%, has made jobs its No. 1 priority. Its fiscal challenge is walking the tightrope between the frugality required to qualify for the euro currency and the pump-priming measures it wants to take to create jobs.

Jacques Barrot, labor minister in France’s former center-right government, accused the left of using businesses like a “cash box” to fund government spending, and some business leaders also complained Monday about the new levy. But in a television interview, Strauss-Kahn said the government’s approach was simple: “It’s those who can pay who should pay.”

The government also took great care to keep the tax bill of French households, now running an average of about 50% of income, from rising further. Over the weekend, Jospin and his lieutenants dropped plans to revoke a previously approved tax cut this year for the country’s most well-off families.

In June, Jospin succeeded Alain Juppe after the latter’s center-right government was upset in a general election. An audit by two independent magistrates, made public Monday morning, found that although Juppe had planned for the 3% deficit target mandated by the euro, French government spending this year in fact was outstripping revenue by as much as $6.1 billion.