'Business friendly' French budget fails to stop tax gripes

If French Finance Minster Laurent Fabius thought the adoption of his 'business friendly' budget by cabinet colleagues yesterday would put an end to country-wide gripes about high taxes he was sadly mistaken.

Despite the fact that Fabius insists he has masterminded the "most ample" reform of the French fiscal system in the last 50 years, people still feel they are paying too many taxes.

Indeed the draft budget was at least partly responsible for the fuel price protests that brought France grinding to a halt earlier this month and sparked copycat demonstrations across Europe.

When, at the end of August, Fabius first unveiled his tax and spend plans for 2001 France's truck drivers were furious that hey had not been granted tax cuts on diesel prices to compensate for the price of crude oil.

They complained that by proposing to cut levies on heating oil by 30%, Fabius had offered a considerable tax break to farmers and fishermen - the fuel can be used to power boats and tractors - but had ignored them completely.

Since then, countless other interest groups from driving instructors to restaurant owners have been jumping on the tax break bandwagon with the rallying cry of "what about me?"

Many analysts here argue that the attitude of the tax protestors, most of them from the small business community, highlights a fundamental problem in French society.

In the words of one editorialist in the left-leaning daily newspaper 'Libération', French people still tend to regard the government as a giant "cash dispenser".

When the going gets tough most French people from the most militant trade unionists to the small-time free marketeers who head up the countries millions of small businesses still expect the state to step in and bail them out.

As another commentator put it, the recent protests provided a perfect example of the age-old French habit of fighting to defend "your own piece of beefsteak."

This underlying attitude means that Fabius was always unlikely to receive much credit for his new budget, despite the genuinely significant tax cuts he has pledged to introduce.

Over the next three years the French government has said it will reduce the overall tax burden by 120 billion francs (18.29 billion euros). Cuts will be made to all levels of income tax as well as to certain fuel levies and other charges.

As far as France's small and medium-sized enterprises (SMEs) are concerned the most significant reforms are linked to reductions of company tax rates. French SMEs already benefit from a preferential tax regime compared to larger firms and this system is set to be beefed up under Fabius' plans. From 1 January 2002 small firms will have to pay a levy of 15% - under half the standard rate of company tax - on their first 250,000 francs (31,000 euros) profit.

The situation will be less advantageous next year however as the reduced tax will be levied at 25%. Aside from this specific tax break for SMEs, all firms in France will see the main rate of company tax reduced progressively from 36.6% to 33.3% over the next three years.

Socialist Fabius was able to make this cut by abolishing a 10% surcharge on companies put in place in the mid 1990s by centre-right prime minister Alain Juppé Fabius also offered a number of less significant tax breaks to the French business community. From next year employers will be able give their employees computers and set off the cost against tax. Firms and private individuals will also be granted tax breaks if they invest in renewable energy technology, such a solar powered water heaters, rather than relying on fossil fuels.

On the controversial question of fuel taxes, Fabius announced the introduction of a 'floating' tax on oil products, which will fall when world crude prices rise and rise when they fall. The government had intended to introduce the new tax from the beginning of next year but in the wake of the diesel protests it decided yesterday to bring in the floating levy next month. The government also stuck to its pledge to introduce a 30% cut in taxes on heating oil, which took effect today.

But despite the Finance Ministers efforts to woo French firms, the country's business community has reacted sniffily to the new budget. Ernest Antoine Sellié, President of French big business lobby the Mouvement des Entreprises de France (MEDEF) called the budget "dull and without design".

MEDEF added in a statement that it "deplored the absence of any measures designed to reinforce the competitiveness of companies." To make matters worse for Fabius, the Finance Minister's tax plans have also irked both the European Central Bank (ECB) and the International Monetary Fund (IMF). Both institutions said Fabius should have used the funds he had at his disposal to reduce France's budget deficit instead of paying for tax cuts.

"If these sort of fiscal measures became a tendency for the euro zone, I would be disappointed," said ECB President Wim Duisenberg yesterday.