During his seven years as French president, Emmanuel Macron has bet on tax cuts for the wealthy and corporations as a way to stimulate the economy. His new government is trying to break that strategy.
Faced with a sharp deterioration in the country’s finances, Macron’s recently appointed prime minister, Michel Barnier, is trying to subsidize corporations and the wealthy in a last-ditch effort to close France’s widening budget deficit and reassure a concerned international community. It opens the door to higher taxes on the class. Investors are concerned about the government’s ability to tackle the problem.
Mr Macron is under pressure to act quickly. Borrowing costs in France, Europe’s second-largest economy after Germany, rose to their highest level on Tuesday since the 2008 financial crisis as investors raised the premium they demand for holding French government bonds. The government faces an uphill battle to rein in ballooning debt and budget deficits, which have reached the highest levels in Europe.
Warning that France’s fiscal situation is rapidly deteriorating, Mr Barnier on Sunday reversed some of Mr Macron’s flagship tax cuts, despite the president promising not to raise taxes just weeks ago. He said he would like to take up this long-standing taboo topic.
“We’re not going to raise taxes on all French people,” Barnier said in an interview on French television. “But we cannot exclude the wealthiest people and the biggest corporations from national efforts to rectify the situation.”
How did France reach this tipping point?
Macron’s reputation as the “president of the rich.”
Since his first election in 2017, Macron has made it a hallmark of his presidency to enhance France’s reputation as a place to do business. He cut taxes on corporations and curbed the national wealth tax, winning praise from investors and the nickname “Rich President” from his critics.
Mr Macron’s tax policy included cutting the official corporate tax rate from 33% to 25% and lowering taxes on manufacturing and industry from what was once the highest level in Europe. He turned a generous temporary job tax cut for businesses into a permanent one. It also introduced a flat tax of 30% on investment profits.
Mr Macron caused controversy by watering down the wealth tax on the very wealthy and replacing it with a tax on real estate assets worth more than 1.3 million euros.
The purpose of tax policy was to stimulate growth by encouraging wealthy people to invest more in the economy and businesses to hire. But critics argue that these policies mainly widen economic inequality while sucking tax revenue from the national treasury. A study by the independent French think tank Institut Montaigne found that the combined measures cost France’s finance ministry nearly 15 billion euros in lost revenue.
The Prime Minister is set on raising taxes.
Barnier will need to find an eye-watering 110 billion euros in savings over the next few years to bring France’s ballooning debt and budget deficit back in line with European Union rules. Much of that will come in the form of cuts to government spending.
Mr Macron has been a vocal opponent of tax hikes, calling the urge to do so “a very French disease”, but Mr Barnier has suggested there is no other option but to raise taxes. So far, the prime minister has not announced any specific tax increases. But in interviews in recent days, he said he and his new cabinet were prepared to cross some red lines that Mr. Macron should not cross.
Among the measures being considered is raising flat taxes by up to 35%, a change that French economists say could bring in up to 300 million euros in new revenue. states.
Temporary taxation on the “super profits” earned by companies is also being considered. The plan was envisioned by Mr Macron but abandoned several years ago as profits for oil and food companies soared in the wake of the pandemic. Some in Barnier’s camp have also floated the idea of bringing corporate taxes closer to the level they were before Macron cut them.
Barnier declined to say whether reinstating a wealth tax was being considered. But if the government did so and cut other tax loopholes, it would bring in between €10 billion and €15 billion a year in revenue, according to French think tank Terra Nova.
French companies support the tax increase with some conditions.
Patrick Martin, president of France’s main employers’ group Médef, said he was “ready to discuss raising taxes on businesses” provided the government sharply cuts spending and does not enact policies that are detrimental to investment and employment. ” he said.
And Rodolphe Saad, the chief executive of CMA CGM’s shipping empire, has signaled that big companies may resign to plug the budget hole, suggesting that his company will temporarily close to shore up France’s tattered finances. He said he was ready to donate money. Unless there are further significant changes in tax law.
“If there is a solidarity contribution by profit-generating companies, CMA CGM will also play its part,” he said in a briefing with reporters on Monday.
Foreign investors have remained silent for now. But the new government is particularly keen not to scare them away. Barnier’s new budget minister will be Laurent Saint-Martin, who previously headed Business France, a quasi-governmental agency in charge of attracting investment. Mr. Barnier also named Antoine Armand, a liberal politician close to Mr. Macron’s views, as the new economy minister.
What happens next?
Finances are deteriorating faster than expected. France’s finance ministry now expects the budget deficit to reach 6% of economic output in 2024 unless the government takes swift action, up from a recent forecast of 5.6%. France’s debt burden has ballooned to 3 trillion euros, more than 110% of its gross domestic product (GDP), making it the third highest debt burden in Europe after Greece and Italy.
After missing last week’s deadline, Barnier will meet with political and business leaders this week to finalize a budget blueprint to present to EU officials. He now faces a Tuesday deadline to set out how France will get its finances back on track.
