France gets double dose of austerity measures

The French Government will impose an extra €7 billion ($12 billion) in spending cuts and tax rises next year to avoid the "dangerous spiral" of debt which has seized the Greek and Italian economies.

In an attempt to rescue the country's cherished AAA debt rating, President Nicolas Sarkozy has been forced to adopt a second austerity package in the space of three months.

The lower rate of VAT will be increased from 5.5 per cent to 7 per cent. Plans to raise the pension age from 60 to 62 will be brought forward by one year. Health and welfare spending will be restrained. Presidential and ministerial salaries will be frozen.

Prime Minister Francois Fillon said yesterday that the measures were necessary to honour a promised cut in the budget deficit.

"Bankruptcy is no longer an abstract word," Fillon warned. After more than 30 years of budget deficits, he said, France had to escape the "dangerous spiral" which led to "stagnation, debt and low competitiveness".

With presidential elections next year and the French economy slowing, Sarkozy has been struggling for months to avoid the harsh austerity measures imposed in Britain, Greece and Ireland. August's €12 billion package consisted mostly of small tax rises and the abolition of tax breaks.

Yesterday's second dose of austerity medicine had to be imposed before the first had even been agreed to by Parliament. The original, official growth forecast for 2012 has been revised from an optimistic 1.75 per cent to 1 per cent.

This threatened France's promise to reduce its annual budget deficit from 5.7 per cent this year to 4.5 per cent next year. Failure to respect the target could threaten France's debt rating, which was put under "observation" by the Moody's debt rating agency last month.

A downgrade would increase the cost of debt repayments and would be potentially fatal politically.

"If Nicolas Sarkozy loses our triple A, he is dead," one Elysee Palace official said yesterday.

Officials say the new austerity measures have been "back-loaded" to have most impact in two to three years. Officially, this is to avoid tipping France into recession. Unofficially, the Government hopes to delay some of the pain until after the two-round presidential elections in April and May.

- Independent