The popularity of Emmanuel Macron is easy to understand: France’s 40-year-old president is youthful and chic, with a rhetorical style that recalls JFK and the personal charm of a Justin Trudeau. His ambitions are attractive, too – to get rid of the right-left divide on the political scene, sweep away the “corrupt” old parties, and transform a country in dire need of reform. He even pledged to shake up the Common Agricultural Policy – until now a taboo subject for any French leader.
Taken together, this really does resemble a revolution, as the title of his campaign book suggests. President Macron cuts a pro-entrepreneurial dash that seems very much of the 21st century, as demonstrated by his inviting of 140 multinational CEOs to a grand reception at Versailles to promote French business on the eve of the World Economic Forum in Davos.
His heart may be “on the left,” as he is fond of saying, but his watchword is pragmatism – a dualism captured by one of his favorite catchphrases: “mais, en meme temps” (“but at the same time”).
Even so, that still leaves the question: does President Macron’s revolutionary style have any substance?
So far, the government has announced tax cuts of 5 billion euros, including the gradual phaseout of the housing tax for some 80 percent of French households. This would be good news, were it not for an estimate by the French National Institute of Statistics and Economic Studies (INSEE) that the state will extract 4.5 billion euros more in taxes from the economy this year. And indeed, early 2018 brought large increases in taxes on motor fuels (up 10 percent for diesel) and cigarettes (up 1 euro per pack), along with higher social security contributions.
Even a new law reducing speed limits on secondary roads to 80 km/hour is regarded less as a lifesaving than a revenue-raising measure, for the traffic fines it will generate. In this way, household purchasing power will decrease even more.
As promised, the government has overhauled France’s “Solidarity Wealth Tax” (ISF) on assets over 1.3 million euros. The ISF has long been recognized as a counterproductive levy, since it encourages rich taxpayers to pursue tax optimization schemes or flee the country as tax exiles. It has been replaced with a new tax (IFI) that focuses on real estate, excluding financial assets and luxury goods. But since this measure stirred up controversy within President Macron’s ruling “Forward” party (La Republique en Marche, or LaREM), special taxes have been introduced on outward signs of wealth such as yachts, luxury cars and expensive jewelry.
In some ways, the change is for the worse. Under the former ISF rules, it had been possible (since 2007) for taxpayers to deduct 50 percent of their investments in small companies (up to a maximum of 90,000 euros per household). This deduction was intended to incentivize “business angels.” Even though the cap was set quite low (French technocrats are traditionally wary of allowing households to engage in too much risk-taking), it was enough to help finance successful start-ups such as Deezer, the music streaming service, or Meetic, the online dating company. Some experts worry that these flows will dry up now with the new scheme.
Mr. Macron’s tax-cut message has also been blurred on the corporate front. After the Constitutional Council overturned a 3 percent tax on dividends instituted by President Francois Hollande five years ago, the government is being forced to refund businesses 10 billion euros. To pay for this and compensate for lost tax revenue, it was decided to create a new levy – a one-time surtax on all French companies with an annual turnover of 1 billion euros or more (about 320 firms). The Ministry of Economy is confident that companies will be happy to pay this surcharge out of “civic-mindedness.”
One of the government’s stated goals is to reduce France’s corporate income tax by 2022 to 25 percent, from the present 33.3 percent. Cutting the rate to just above the European average seems sensible, since it is currently rather high by international standards. Still, there are complications. Once the new contributions and levies are taken into account, along with applicable deductions, France’s real effective corporate tax rate will range between 15 and 44 percent (encompassing six different nominal rates).
Even at levels below the top punitive rate, this tax system breeds a sense of legal confusion and insecurity that is far from the business-friendly image Mr. Macron seeks to project.
Besides domestic tax controversies, President Macron also has foreign partners to please on fiscal policy. For far too long, France has flouted its commitments to deficit reduction under the European Union’s Stability and Growth Pact. The government now believes it has managed to bring the 2017 budget deficit down to 2.9 percent of gross domestic product, in line with the EU’s 3 percent limit, and projects 2.8 percent for 2018.
This optimistic assessment is shared by the Organisation for Economic Co-operation and Development (OECD), which predicted in its November 2017 Economic Outlook that the government would meet its 2017-2018 deficit targets, in part thanks to economic growth of 1.8 percent. However, the OECD still insists that France needs more structural reforms. It specifically mentions downsizing the multilayered government bureaucracy, especially the administrative “overlap” between various levels of local governments.
Specifically, the organization urged that small municipalities be merged and other means sought to cut jobs by natural attrition. Meanwhile, the retirement age for the remaining civil servants should be raised and training provided to improve the productivity of public administration. By traditional French standards, these recommendations were shocking.
France devotes 56.2 percent of its 2.2-trillion-euro GDP to public spending, compared with the 41 percent average in OECD countries. As a presidential candidate, Mr. Macron pledged to reduce public spending by 60 billion euros a year. Upon taking office, his government increased the target to 80 billion euros after five years.
The initial plan was to start with 20 billion euros of spending cuts in 2018, but this was soon reduced to 14 billion. Most reductions were deferred until the end of this presidential term, thus decreasing the probability they would be realized. Most important, details on how public expenditures are to be lowered have not been forthcoming, and a general air of vagueness on the subject prevails. It appears that the greatest economies are being shoved downward to the local governments and municipalities, which must be negotiated with. How this budget bargaining will go is anyone’s guess.
As yet, no serious attempt has been made to overhaul France’s elaborate and wasteful “layer-cake” administration. President Macron did offer a new “contract” to local governments (regions, departments and cities), which proposes giving them greater latitude in exchange for capping operational spending growth at the 340 biggest entities (accounting for more than 80 percent of local spending) to 1.2 percent per year. Later, Mr. Macron referred to the local authorities’ right to “experiment,” which suggests a significant degree of autonomy.
For now, however, government measures have created more problems for local governments. The gradual elimination of the housing tax removes a large source of funding for cities, forcing them to look for other sources of revenue. The government’s apparent aim is to encourage municipal spending cuts. But the changes do little to reduce the complexity of France’s awkwardly decentralized administrative system.
A significant part of the budget savings was to be achieved, as mentioned above, by shedding civil service jobs at both the central and local government levels. Mr. Macron’s initial plan called for the elimination of 120,000 positions in less than five years (50,000 in the central government and 70,000 in local governments).
However, of the 10,000 job cuts expected for 2018, only 1,600 are now planned, and less than half of these are full-time jobs. According to a statement released by the government on February 1, the main approach will be voluntary redundancies and outsourcing to contract workers. As expected, the labor unions reacted very negatively, accusing the government of “dismantling the status of a civil servant.” Tense negotiations with unions representing public sector employees can be expected to drag on for the rest of this year.
In the private sector, one likely gain from Mr. Macron’s decrees last summer to introduce more flexibility will be to create more jobs. But given the limited scope of these measures, the attempt can only be described as timid. At 9.8 percent, France’s unemployment rate is far higher than that in Germany (3.6 percent) or the United Kingdom (4.2 percent). To materially change these proportions, much more was needed.
More optimism might be in order if Economy Minister Bruno Le Maire succeeds by spring in negotiating a new “Action Plan for Business