Austerity – French Style

Steven Erlanger reports on the fiscal proposals of the new French government:

France’s new Socialist government announced on Wednesday billions of euros in tax increases and new taxes, to be borne by businesses and the wealthy, in a revision of the 2012 budget designed to meet promised deficit targets in a period of nearly stagnant growth. The government needs to make up a gap of 6 billion to 10 billion euros, or $7.5 billion to $12.5 billion, this year to bring the budget deficit down to 4.5 percent of gross domestic product, according to the national audit office, the Cour des Comptes. To meet a 3 percent target in 2013, an additional $41.2 billion in tax revenue and spending cuts will have to be found, the auditors said. For this year alone, the government announced about $9 billion in higher taxes, with about $7.6 billion more to come next year. A freeze on government spending is expected to save $1.8 billion ... The auditors urged the government to cut spending more than raise taxes, because the latter hurts economic growth, but the prime minister, Jean-Marc Ayrault, insisted that the key to growth was investment, not austerity. Still, spending cuts would seem to be inevitable to meet the 2013 target.

Ayrault’s general statement that investment not austerity was the key to growth is simply good Keynesian economics. Which is why he should have just ignored these auditors. Imposing taxes on the well to do is likely to have the least damage to aggregate demand but wouldn’t a temporary increase in government spending been an ever better policy for restoring full employment? But I guess for some reason – even this socialist government has to obey the auditors and ignore the economists. Ahem!