REVIEW & OUTLOOK
Updated October 1, 2012, 7:28 p.m. ET
Europe's Same Old Austerity
France and Spain try to tax their way to growth.
Remember all that euro-babble before the French election about fiscal "austerity" harming growth? Well, meet the new austerity, same as the old austerity, which means higher taxes on the private economy and token discipline for the state. Growth is an afterthought.
That's the lesson of French President François Hollande's new "fighting" budget, which is supposed to reduce the deficit to 3% of GDP from 4.5% and represent the country's toughest belt-tightening in three decades. That's not a high bar, but Mr. Hollande can't meet even that test: The 2011 budget cut the deficit by more in GDP terms.
More telling is that two-thirds of the €30 billion in so-called savings is new tax revenue, and one-third comes from slowing spending growth. Total public expenditure—already the second most lavish in Europe—will increase by €6 billion to 56.3% of GDP. All ministry budgets will fall by 5%, except education, security and justice, but total government payroll will increase slightly to €80.6 billion.
The real austerity will be imposed on taxpayers, and not only on the rich. Income above €150,000 will now be taxed at 45%, up from the current 41%. Mr. Hollande's 75% tax rate on income over €1 million comes into effect for two years, reaping expected (and predictably paltry) revenue of €200 million. That's dwarfed by the €1 billion from reducing the threshold for the "solidarity" tax on wealth to €800,000 from €1.3 million.
The French Socialists will also now tax investment income at the same high rates as regular income. The rates have been 19% for capital gains, 21% for dividends and 24% for interest income. If Mr. Hollande's goal is to send capital out of France, that should help.
All told, 89% percent of French households will experience no change or a slight decrease in their tax bills, according to the finance ministry. But the highest-earning 1% of households will pony up €2.8 billion more next year. The finance ministry says this will "put justice at the heart of the fiscal system." Economic good sense is another matter.
Spain's 2013 budget, announced Thursday, is more expenditure-focused than France's: 58% percent of the projected consolidation takes the form of lower spending, and 42% comes from higher revenue. Madrid also takes a sharper knife to its own ministries than Paris: Government departments' budgets will be cut by 8.9% on average. State payrolls are to be slashed by 3.9%.
But Madrid can call its new austerity measures spending-focused only because Spanish households have already seen their taxes rise enormously. Spain's value-added tax increase, to 21% from 18%, went into effect last month. Prime Minister Mariano Rajoy, who as a candidate promised not to raise the VAT, also raised income-tax rates upon entering office last December.
The new budget does impose a limit on amortization deductions for large firms, a new tax on short-term capital gains, and a 20% tax on lottery winnings in excess of €2,500. Treasury Minister Cristóbal Montoro said Friday that the government is also keeping a "toolbox" of additional tax measures that can be launched over the next year if revenue doesn't keep up with projections.
Four years after the worst of the financial panic and two and a half years after the euro crisis began in earnest, much of Europe remains stagnant or worse. No small part of the blame lies with the Continent's intellectual consensus that the state's books can be balanced and "growth" ignited by continuing to plunder the private economy.
That's the lesson of French President François Hollande's new "fighting" budget, which is supposed to reduce the deficit to 3% of GDP from 4.5% and represent the country's toughest belt-tightening in three decades. That's not a high bar, but Mr. Hollande can't meet even that test: The 2011 budget cut the deficit by more in GDP terms.
More telling is that two-thirds of the €30 billion in so-called savings is new tax revenue, and one-third comes from slowing spending growth. Total public expenditure—already the second most lavish in Europe—will increase by €6 billion to 56.3% of GDP. All ministry budgets will fall by 5%, except education, security and justice, but total government payroll will increase slightly to €80.6 billion.
The real austerity will be imposed on taxpayers, and not only on the rich. Income above €150,000 will now be taxed at 45%, up from the current 41%. Mr. Hollande's 75% tax rate on income over €1 million comes into effect for two years, reaping expected (and predictably paltry) revenue of €200 million. That's dwarfed by the €1 billion from reducing the threshold for the "solidarity" tax on wealth to €800,000 from €1.3 million.
The French Socialists will also now tax investment income at the same high rates as regular income. The rates have been 19% for capital gains, 21% for dividends and 24% for interest income. If Mr. Hollande's goal is to send capital out of France, that should help.
All told, 89% percent of French households will experience no change or a slight decrease in their tax bills, according to the finance ministry. But the highest-earning 1% of households will pony up €2.8 billion more next year. The finance ministry says this will "put justice at the heart of the fiscal system." Economic good sense is another matter.
Spain's 2013 budget, announced Thursday, is more expenditure-focused than France's: 58% percent of the projected consolidation takes the form of lower spending, and 42% comes from higher revenue. Madrid also takes a sharper knife to its own ministries than Paris: Government departments' budgets will be cut by 8.9% on average. State payrolls are to be slashed by 3.9%.
But Madrid can call its new austerity measures spending-focused only because Spanish households have already seen their taxes rise enormously. Spain's value-added tax increase, to 21% from 18%, went into effect last month. Prime Minister Mariano Rajoy, who as a candidate promised not to raise the VAT, also raised income-tax rates upon entering office last December.
The new budget does impose a limit on amortization deductions for large firms, a new tax on short-term capital gains, and a 20% tax on lottery winnings in excess of €2,500. Treasury Minister Cristóbal Montoro said Friday that the government is also keeping a "toolbox" of additional tax measures that can be launched over the next year if revenue doesn't keep up with projections.
Four years after the worst of the financial panic and two and a half years after the euro crisis began in earnest, much of Europe remains stagnant or worse. No small part of the blame lies with the Continent's intellectual consensus that the state's books can be balanced and "growth" ignited by continuing to plunder the private economy.
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