Austerity plan may mean rise in VAT

LEAKS from the finance ministry have revealed that the government is looking at a new austerity plan on top of the measures that are being voted on in parliament.

Newspaper Journal du Dimanche revealed what it said were the five principal measures: an increase in business tax, a new intermediary tier of VAT at 7% or 9%, reduction in support for local authorities, restricting the increase in the social security budget and cutting the expenses of government departments and elected representatives.

Full details of the proposals, which will involve raising new money and cutting back on spending, are due to be revealed in the days following this week’s G20 summit in Cannes, the newspaper said.

In his televised interview last week President Sarkozy said the government had to find an extra €6-8 billion in savings.

One measure is the increase in business tax for companies with turnovers of more than €150 million which would rise from 33% to 36%. It is a move that could bring in more than €1bn while also meeting with public approval.

Introducing a new VAT rate is being looked at as a way of raising a significant amount of money and also of bringing France more into line with German taxation - which Sarkozy said last week was vital for the future. At present, restaurants, domestic services and improvement works on private homes benefit from a 5.5% rate of VAT and the plans suggest a new rate of 7% or 9%.

However, while the change could bring in €1.5bn at 7% or 3bn at 9% commentators have said it would be extremely unpopular; especially in the run-up to next year's presidential election and Sarkozy himself promised on TV there would be no general increase in VAT.

A potential €4bn gain could see the state cutting back on its aid for local authorities and putting their spending under the microscope. However, the move is also likely to improve unpopular - as well as difficult to achieve as councils are already heavily in debt and would struggle to finance services.

Plans for a 2.8% increase in the social security budget could be scaled back to 2.5% in the new proposals. The government would also tighten up the hunt for fraudsters. These measures could bring in €1bn but could prove unpopular if health services are hit.

Last week Sarkozy said that the social security debt was a major consideration for credit rating agencies, one of which has put France on its watch list.

Cutting the state's budget would bring an immediate publicity boost, especially if MPs and senators see allowances reduced in a bid to lead by example. Ministry budgets could also be cut. However, the likely financial impact is not likely to be large, at up to €40 million.