IT IS IMPOSSIBLE to escape news about the financial problems facing the Eurozone.
Nonetheless, we are well-placed. France was one of the first countries in the world to exit the recession and its economy is fundamentally strong.
The government has been able to avoid implementing the unpopular austerity measures other Euro states are having to make. This does not however mean deficit reduction measures do not need to be taken. If anything, if the government is to continue to avoid austerity measures it will need to find other ways to improve its finances.
In early June Prime Minister Fillon said the government must not delay and must act with discipline but without sacrificing investments in the future.
France’s deficit is forecast to be 8% this year. The government aims to trim it to 6% next year, 4.6% in 2012 and to the EU limit of 3% in 2013.
One obvious way to increase government revenue is to increase tax rates.
While the government has been keen to avoid direct tax hikes, it can of course take a less direct route. In its 2010 Finance Bill it reduced the “social” tax breaks and more recently it announced it will cut certain niches fiscales (tax advantages).
These include VAT reductions or various tax credits which reduce an individual’s or company’s tax bill (eg. for charitable donations, home help, mortgage interest, child care etc). Some will be abolished and some reduced.
Following its conference on debt in May, the government announced its intention to make €5 billion of savings within the next two years.
At the beginning of June, Fillon confirmed that most of the existing tax advantages will be reduced by 10%, while others will be abolished or capped. For example, a tax credit of 50% would be reduced to 45% and the reduced rate of VAT for renovation work would become 6%, not 5.5%.
France has over 500 tax breaks, costing the state €75 billion a year, with many new ones added over the last 10 years. Fillon said that this “bad habit” needs to be stopped and he emphasised ministers will no longer be able to use their discretion to create new ones. Defending national sovereignty means redressing public finances and ministers should be proud to spend less, he said.
With such a wide range of tax credits available, whether or not you will be affected by the changes and to what extent will depend on your circumstances and what you are already claiming for – and of course, which ones the government opts to cut or abolish. Budget Minister François Baroin has said detailed plans will not be announced before the end of July and perhaps not until the end of August.
While there are 500 credits, just 16 of them make up 50% of the costs – and these 16 are particularly important for the economy. For example, for families the credit for employing home help (nannies, carers etc), and for businesses the tax credit for research costs, something which attracts foreign investors. It would be easiest – and fairest – to reduce most of the tax breaks by 10%, an approach which would give lobby groups less to complain about. However Fillon did say there would be some exceptions as the government does not want to increase the cost of employment.
The only hints we have so far is that the government will consider reducing tax benefits such as credits for gifts, certain insurance premiums, loans to start up businesses, credits for aid and for tobacconists. Baroin also pointed out that some of the benefits would need to be reduced by more than 10% to protect other spending which cannot be touched.
France is already a high tax country. A 2010 study carried out in Belgium by newspaper L’Anglophone and the Institut Economique Molinari, revealed that out of the 27 countries in the EU, France has the third highest tax burden.
The study, called Wages and Tax for the Average Joe in the EU 27, calculated the average French taxpayer pays 56.4% of his income (based on average gross annual earnings) in tax, and that “tax freedom day” (the day you stop working for the government and start working for yourself) does not fall until July 26 in France. In other words, French residents work almost seven months to earn enough to pay tax. The reduction and/or removal of tax breaks would therefore increase the tax burden even more.
All this makes it all the more important to take whatever steps you can to legitimately reduce your tax liabilities in France. With the use of well-established tax planning devices which are approved products in France you can often lower taxation on your savings, investments, pensions and wealth.
This column is written by Bill Blevins of Blevins Franks financial advice group (www.blevinsfranks.com) who has written for the Sunday Times on overseas finance for the last 10 years. He is the co-author of the Blevins Franks Guide to Living in France. This column is exclusive to Connexion.