French stunned by £7bn spending cut

The French government will impose an extra €7bn in spending cuts and tax rises next year to avoid the "dangerous spiral"of debt which has seized the Greek and Italian economies.

In an attempt to rescue the country's cherished "Triple A" debt rating, President Nicolas Sarkozy has been forced to adopt a second package of austerity measures within the space of three months.

The lower rate of VAT will be increased from 5.5 per cent to 7 per cent. Plans to raise the pension age from 60 to 62 will be brought forward by one year. Health and welfare spending will be restrained. Presidential and ministerial salaries will be frozen.

The increased "low" rate of VAT will apply to restaurant meals, which were controversially reduced from the higher 19.6 tax band only two years ago.

The Prime Minister François Fillon said yesterday the measures were necessary to honour a promised cut in the French budget deficit next year despite a weaker than expected growth forecast. "Bankruptcy is no longer an abstract word," Mr Fillon warned. After more than 30 years of budget deficits, he said, France had to escape from the "dangerous spiral" which led to "stagnation, debt and low competitiveness".

With presidential elections approaching next spring and the French economy slowing, President Sarkozy has been struggling for months to avoid the kind of harsh austerity measures imposed in Britain and in the heavily indebted Euroland countries such as Greece and Ireland. A €12bn package announced in August consisted mostly of small tax rises and the abolition of tax breaks.

Yesterday's second dose of austerity medicine had to be imposed before the first had even been agreed by parliament. The original, official growth forecast for 2012 has been revised from an optimistic 1.75 per cent to 1 per cent.

This threatened France's promise to reduce its annual budget deficit from 5.7 per cent this year to 4.5 per cent next year. Failure to respect the deficit target could threaten France's Triple A debt rating, which was placed under "observation" by the Moody's debt rating agency last month.

A ratings downgrade would increase the cost of debt repayments and would be a potentially fatal political blow to the president.

"If Nicolas Sarkozy loses our Triple A, he is dead," one Elysée Palace official told Le Monde yesterday.

Officials say that the new austerity measures have been "back-loaded" to have most impact in two to three years. Officially, this is to avoid tipping France into recession. Unofficially, the government hopes to delay some of the pain until after the two round presidential elections in April and May.

Yesterday's €7bn package was evenly divided between tax rises and spending cuts. The lower rate of VAT will be brought in line with Germany's 7 per cent rate, except for essentials like food and energy. Some welfare spending will no longer be inflation-linked.

Austerity plan

* Lower rate of VAT to be increased from 5.5 per cent to 7 per cent (except for essentials like food, gas and electricity).

* Date for increasing retirement age to be brought forward from 2018 to 2017.

* An extra 5 per cent tax on companies with a turnover bigger than €250m.

* Freeze of presidential and ministerial salaries until state budget is balanced.

* Family and housing allowances no longer to be increased in line with inflation.