French Government Tweaks Budget to Fund Tax Cuts

Emmanuel Macron's government revised its budget plans Wednesday to front-load deeper tax cuts the French president says will drive job creation and growth.

The French government made the tweaks after Prime Minister Édouard Philippe said only a week ago that some tax cuts would be delayed as the country faced a mountain of debt and a larger than expected deficit this year.

On Wednesday, however, Mr. Philippe said that after consulting with Mr. Macron he will make tax cuts to the order of EUR11 billion ($12.6 billion) in 2018 to spur the gradual acceleration in the economy. To finance the cuts and keep the deficit under the European Union's limit of 3% of economic output, the government will find EUR20 billion of savings in 2018.

"We want to spark a tax blast effect in favor or investment, employment and growth," Mr. Philippe said in an interview with French daily Les Echos.

The to-and-fro on the budget plans show the challenge Mr. Macron faces to juggle competing pledges that defined his political brand. On one hand, the 39 year-old leader is seeking to improve France's standing in Europe by repairing the country's finances, while on the other hand he is promising pro-business measures that can be costly to the public coffers.

The announcement of delays to tax cuts drew criticism from business leaders last week, but overall Mr. Macron's pro-business stance has struck a chord with investors. At an event promoting Paris as a financial center Tuesday, J.P. Morgan Chase Chief Executive Jamie Dimon praised the new government for making the capital city a more attractive place to invest and recruit thanks to a promised loosening of labor laws and lower taxes on the financial sector.

"It has a new president who I think is great, who's behind entrepreneurship, growth and jobs. And it's nice to be wanted," Mr. Dimon said.

Of the EUR11 billion in tax cuts in 2018, the French Prime Minister said that overhauling France's wealth tax to encourage investment will cost the state EUR3 billion in lost revenue next year. Cuts to taxes on savings will cost EUR1.5 billion and a reduction in local residency taxes another EUR3 billion.

To finance the tax cuts and keep a lid on the deficit, the government will freeze the volume of public spending. That will deliver EUR20 billion of savings in 2018, Mr. Philippe said, without giving details of where the state will rein in spending.

Overall, the deficit will fall to 2.7% of gross domestic product in 2018 from 3% this year, the government said. In 2019, the deficit will rise to 2.9% of GDP due to the one-off cost of transforming a tax credit into a straight tax cut. The deficit will then drop to 1.5% of economic in 2020, according to the government forecasts.

Write to William Horobin at William.Horobin@wsj.com

(END) Dow Jones Newswires

July 12, 2017 10:26 ET (14:26 GMT)