Latest Updates on French Budget
- Updated with the latest French budget proposal.
- Originally published.
French President Emmanuel Macron is committed to reducing the nation’s budget deficit over the next four years, yet achieving a meaningful consensus has been elusive. This challenge comes amid an ongoing debate in France regarding economic growth, public spending efficiency, and overall fiscal fairness. Citizens are questioning the role of growth and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy in long-term fiscal stability.
Public protests, like the Yellow Vest movement, highlight the critical concern over tax policy’s impact on living standards across political parties. Partners keen on EU-level economic reforms, including unified debt proposals to support a more assertive geopolitical agenda, are watching these developments intently.
The real challenge for France lies not in finding lucrative economic activities to tax, but in tackling the inefficiencies of its tax system. Systematic and competitive reform must concentrate on a principled approach to tax policy.
**Current Reform Proposals**
In March, former Finance Minister Bruno Le Maire proposed reducing public spending to address the budget gap while ruling out tax hikes, aligning with President Macron’s long-standing stance since 2017. This position aims to restore competitiveness, stimulate growth, and raise revenue, considering France’s high combined tax and mandatory contribution rates and a concerning 110.6% debt-to-GDP ratio.
Critics argue that neither growth nor public spending cuts alone can stabilize finances in light of rising interest rates, green transition investments, and increased defense expenses, suggesting tax hikes are inevitable.
New Prime Minister Michel Barner recently unveiled a budget plan promising €40 billion in savings and potentially raising €20 billion through temporary taxes, including a windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. on companies with over €1 billion turnover and additional taxes on wealthy individuals. The aim is to lower France’s deficit from nearly 6% in 2024 to below 3% by 2029, aligning with EU deficit requirements.
However, tax reform in France extends beyond taxing the wealthy or expecting more from lower-income groups. Flawed policies that might politically appeal but fail to address core issues only deepen public distrust in finding viable solutions.
**Importance of Economic Growth for Revenue**
Reducing public spending offers a short-term fix for the budget deficit. However, given France’s tax and social contribution rates hovering around 50% of economic output, policymakers must avoid drastic cuts that could hinder long-term growth. For every 1% loss in GDP, expect a 0.5 percentage point increase in the deficit.
Equally crucial for growth is recognizing the varying impacts of different taxes on the economy. Taxes on mobile resources, like capital, are most distortive. In contrast, land taxes remain stable and minimally distortive. Consumption taxes, notably value-added tax (VAT), pose a more neutral and efficient revenue solution. Understanding these differences enables policymakers to better achieve growth and revenue ambitions.
**Does France’s Tax System Foster Competitiveness?**
A competitive tax system maintains low marginal rates due to capital mobility, while a neutral system aims to raise ample revenue with minimal economic distortion. Despite France’s gradual progress under President Macron—like reducing the corporate income tax from 33.3% to 25.83% and implementing property tax reforms—significant complexity and distortive policies persist, according to the 2023 International Tax Competitiveness Index, where France ranks 36th among 38 OECD countries.
For instance, France scores poorly on consumption taxes, hindered by rate reductions and exemptions in its VAT base, leading to inefficiency. The VAT threshold is the third-highest in the OECD relative to purchasing power.
The French income tax structure complicates workforce mobility, with unintended marginal tax wedge spikes affecting average-income workers. Also, France uniquely imposes business turnover taxes that challenge firms’ economic alignment. Despite recognizing these issues, reforms are delayed, further exacerbating the competitiveness deficit.
**Advancing Towards Efficient Reforms**
For policymakers keen on enhancing revenue while ensuring economic growth, actionable solutions exist. France’s VAT policy gap, the largest in the EU, represents lost revenue due to deliberate policy choices. By optimizing these choices, economic growth can be fostered.
Smoothing marginal tax rates can raise labor participation and boost worker mobility. Ending regressive production taxes will enhance business competitiveness. These measures can notably reduce France’s labor tax burden, among the OECD’s highest at 47%.
Rather than favoring politically expedient yet unsound solutions, structural reforms focused on competitiveness, neutrality, and efficient revenue methods can significantly bolster growth and secure France’s fiscal future.
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