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      French Socialists Now Face The Challenge Of Balancing The Budget

      Despite calls for slashing government spending from the national audit, the Socialist government of France is signalling higher taxation.
      By Amiel Ungar
      First Publish: 7/8/2012, 7:19 AM

      Hollande and Ayrault
      Hollande and Ayrault
      Reuters

      Having won the presidential and legislative elections, the French Socialists now move to tackle the more daunting job of getting French finances in order.

      In the run-up to legislative elections, the Socialists promised to rely on the national audit office and now the report is in. Some observers originally predicted that the report would be used as an excuse to allow the French Socialists to back away from their electoral promises for scrapping austerity and going full speed ahead with government stimulated growth measures. The national audit office recommended slashing government spending.

      The government is so far going another route - by raising taxes on the most wealthy citizens, imposing a windfall to tax on oil refineries and gas stations that benefited from the oil price hikes. Foreign vacation homes in France are also going to be hit.

      France and Germany, surprisingly, collaborated on a policy that reverses the decision on freezing the European Union budget. This means that the commitment by the former French president Nicolas Sarkozy to freeze European Union spending until the year 2020 is now a dead letter.

      The real fun and games will begin with next year's budget that the Socialists have to prepare (as opposed to making corrections on the budget that they inherited from the previous government). Closing this year's gap to a 4 1/2% deficit required the government merely to come up with €10 billion. Getting down next year to 3% deficit will require a threefold effort.

      The French Prime Minister, Jean-Marc Ayrault, has called the battle of the budget a matter of national sovereignty and patriotism. According the French Institute of Public Opinion (IFOP), the vast majority of the population (67%) is ready for austerity measures and this figure represents 77% of voters for the left and 66% of voters for the right. Only among supporters of the National Front is there less than a majority (44%) supporting austerity. During the campaign, the party's leader Marine Le Pen, attempted to convince voters that protectionism and exiting the European Union could reverse the economic slide.

      France has been lucky so far to escape the pressures that have been applied to Spain and Italy on the bond market. As France will have to refinance over $200 billion in debt, the country is fortunate in having to pay only 2.5% interest compared with the 6-7% interest confronting Spain and Italy. If that changes for the worse, then all bets are off.