PARIS (AP) — President Nicolas Sarkozy's government has bowed to economic reality, admitting its growth forecasts were overly rosy and announcing an euro11 billion ($16 billion) austerity package in a bid to ensure that France doesn't miss a vital pledge to cut its deficit.
The government unveiled the package of spending cuts and tax increases two weeks after France came under fire by investors who feared the country's high debt and deficit levels, as well as its role bailing out weaker European partners like Greece.
Prime Minister Francois Fillon said the austerity package is vital for France to keep its pledge on deficit reduction and maintain its triple A credit rating.
France has not managed to balance its budget in three decades, and Sarkozy has staked his credibility on hitting a series of deficit targets over the next three years.
Fillon blamed the international economic slowdown for France's failure to achieve the 2 percent growth this year that Finance Minister Francois Baroin said only last week was still within reach.
The country now expects to grow only 1.75 percent this year, and the same amount in 2012. The government had built its 2012 budget, a critical election year for Sarkozy, on a target of 2.25 percent growth.
Sarkozy's austerity package consists largely of closing tax loopholes and scraping deductions for the country's largest companies. But it also includes a euro200 million tax hike on the country's wealthiest taxpayers via a 3 percent "exceptional contribution" on incomes over euro500,000.
Fillon said the measures would ensure France achieves its pledge to European partners and to the holders of its euro1.6 trillion in debt to cut its deficit to 5.7 percent this year from 7.1 percent in 2010. France is also committed to cutting its debt to at least 4.6 percent in 2012 and 3 percent in 2013, regardless of whether economic growth comes back.
Among the tax hikes in Sarkozy's plan are a 6 percent rise in the cigarette tax, higher taxes on hard alcohol like vodka, whiskey and eau de vie, and a new tax on sugary soft drinks.
The new tax on high earners will be repealed if and when France brings its deficit down below 3 percent, Fillon said.
A group of 16 of France's mega-rich, including L'Oreal heiress Liliane Bettencourt, published an open letter Wednesday proposing they pay this tax as their contribution to the nation's efforts to face down its worsening deficit and debt situation.
The French government was put under pressure to cut deeper into spending after figures earlier this month showed growth in Europe's second biggest economy ground to a halt in the spring, in another sign that the global economy is facing rising recessionary threats.
With the worse-than-expected French growth figures suggesting a possible budget shortfall this year, government ministers were forced to find additional savings to ward off speculation by investors that France could become the next major economy after the U.S. to lose its coveted triple-A credit rating.
The French economy posted zero growth in the second quarter, national statistics agency INSEE said. Government economists had forecast growth of around 0.2 percent in the period. Consumer spending slumped 0.7 percent and exports stagnated during the second quarter. Growth in the first quarter was nearly 1 percent.
Views on the weak performance were mixed, with warnings that a stagnant economy will make it harder to reduce the deficit.
Greg Keller can be reached at http://twitter.com/Greg_Keller