Hollande's 2013 budget asks for 'unprecedented effort' to find €36.9bn in savings and includes 75% supertax on the rich

This article is more than 8 years old

This article is more than 8 years old

To the dismay of a swath of French bankers, business leaders and the wealthy, President François Hollande has remained true to his word and unveiled €20bn (£16bn) in new taxes, including a 75% "supertax" band that will hit the rich.

In what Hollande has described as France's harshest budget in 30 years, business and personal taxpayers were asked on Friday to make an "unprecedented effort" to slash the country's public spending deficit.

However, the Socialist government sidestepped swingeing cuts in public spending, including pensions and state salaries, in its 2013 budget, which aims to find €36.9bn in savings.

It was also forced to concede it could not keep its pledge to get the country out of the red by 2017.

The budget was a delicate balancing act in which Hollande sought to reassure investors and the financial markets, while simultaneously hiking taxes on large businesses and high-earners.

However, it commits the government to an austerity programme that will be unpopular with leftwingers in the party, at a time when unemployment is rising and the economy teeters on the brink of recession.

Hollande and the prime minister, Jean-Marc Ayrault, had stressed prior to what they described as a "combat" budget their aim to reduce France's public deficit to 3% of GDP by 2013, in line with its EU commitments. The deficit is around 4.5% of GDP for this year.

The budget aims to raise two-thirds of the £36.9bn savings with extra taxes split evenly between households and large companies, plus more than €10bn in public spending cuts. The burden between taxes and spending cuts would be shared 50-50 from 2014, the government said.

The standout measure, from a public perspective, was a new 75% tax rate on people earning more than €1m a year. This is expected to hit only 2,000 taxpayers. A new 45% income tax band is to be introduced for those earning more than €150,000 a year.

Business leaders, including L'Oréal chief, Jean-Paul Agon, have criticised the "supertax", claiming it would prevent France from attracting the cream of executives and drive the wealthy into tax exile.

On Friday, France's opposition UMP party reacted to the budget with dismay.

Former agriculture minister Bruno Le Maire said he was worried and disappointed, adding: "France is going to the wall."

He told Europe 1 radio: "None of the solutions announced will get the country back on its feet, fight unemployment or create jobs."

Marine Le Pen, president of the far-right Front National, described the budget as "absurd hyper-austerity".

She said: "This budget puts France on the same road as Greece, Ireland, Portugal and Spain."

François Rebsamen, president of the Socialist party group in the senate – the upper house of parliament – said the budget was "constructive". He said: "The battle to put our country back on its feet, for employment, for the return of growth and spending power, has started and the 2013 budget, which is fair, rigorous and constructive, will be a decisive factor in winning it.

"Efforts have been asked of the wealthiest while the middle and working classes are spared. The tax burden on companies has been rebalanced in favour of small and medium enterprises, and therefore in favour of competitiveness."

Ayrault promised on television on Thursday that the budget deficit target of 3% – a pillar of Hollande's presidential campaign earlier this year – would be met. He insisted France had to avoid the escalating borrowing costs that have torpedoed the economies of other eurozone countries.

"If we abandon this goal, then straight away the rates will rise and we will find ourselves in the same situation as Italy and Spain. I do not want that," he said. "We cannot continue with the debt and the deficits we have now."

The government fears any sign it is not addressing its inflated deficit might see the financial markets turn on France, the eurozone's second biggest economy.

However, Ayrault admitted France would not balance its books by 2017, when Hollande's term in office ends, but would have a public deficit of around 0.3% of GDP.

He also confirmed he was expecting growth of 0.8% for 2013, which economists say is too optimistic. He said the figure was "realistic" and "attainable". The government is then expecting 2% growth every year between 2014 and 2017.

Just four months into his five-year term, Hollande is under fire from all sides. As well as the grumbling from business leaders, unemployment that topped the symbolic 3 million in August, and tumbling popularity in the polls, the president is facing revolt from traditional allies in the unions and leftwing groups that are threatening strikes if the budget is too austere.

A demonstration is planned for Sunday against the EU budget treaty, which imposes strict deficit limits.

The French finance minister, Pierre Moscovici, said getting the public deficit down to 3% was "vital for the credibility of the country".

"We are committed to it and we will meet it," he said.

However, Eric Heyer of the Economic Conjuncture Observatory, was sceptical: "It has never been done before," he told French journalists.

Elie Cohen, director of research at the CNRS thinktank, added: "A 1.5% reduction of the deficit represents a considerable effort at the best of times. In a period of zero growth it would be exceptional."

Ayrault has claimed that only 10% of French taxpayers will pay more as a result of the 2013 budget, but analysts estimate the new taxes mean 4.1m households will pay more, and 8.5m will pay less.

The prime minister added that the increased taxes on businesses would not hit small and medium-sized companies crucial for job creation.

"The effort we are demanding from our biggest companies is reasonable and fair. Not only have we spared small companies, we are going to help them create the jobs the country needs," he said.