Hoping to avoid the debt crisis that is sweeping through Europe, French President Francois Hollande has begun outlining his plan to keep the deficit at 3% of GDP. In order to reach this goal the French government must find $30 billion in savings. Part of the plan involves keeping government spending where it is, and not increasing it. Holding spending to current levels would save the government $10 billion. The other half of the plan is increase revenue by about $26 billion through tax increases.
It is being reported in France that the tax increases would hit firms, savings, and wealthy households. The tax increases have been discussed for some time, with some worrying that it will cause the wealthy to flee France. The combination of a spending freeze and tax increases could hurt the French economy as well. As of now growth forecasts call for 1.2% economic growth in 2013, but those numbers are subject to change.
The French policy sounds similar to the looming “fiscal cliff” in the US. Due to the Budget Control Act, a series of massive spending cuts known as sequestration are about to be enacted. On top of that, the Bush tax cuts are set to expire at the end of 2012. If those policies go through, the CBO is projecting that the US economy will contract and slip back into a recession.
France has limited options on the table. Many countries across Europe failed to deal with their debt problem, and they had to be bailed out. Those bailouts came at a cost: tough austerity measures that damaged their economies, making the debt crisis even worse. Without some form of action, the same thing could happen in France.
The European Central Bank announced a new bond buying program aimed at alleviating the sovereign debt crisis across the continent, and the news had markets soaring across the world. France can survive the light austerity measures that are being pushed, and it is better to pull the trigger now than to wait for the problem to get worse. Down the road, tougher austerity measures would be needed to handle the debt problem, and as we have seen, strict austerity often makes things worse before it improves the situation.
Politics are what is pushing the action right now. President Hollande is facing a dip in popularity. He won the French presidency in May by 51% of the vote, but his approval ratings have already fallen below 50%. This discontent is similar to that facing President Obama in the US. Citizens across the world in developed countries are growing weary of leaders who do little to solve their problems. With few good options available to elected officials, that discontent is likely to linger for some time.