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Since Macron entered the Elysee Palace in 2017 promising to cut taxes, boost growth and shrink the state, public spending has increased, and so has France's debt-to-GDP ratio...
France's debt has skyrocketed, deficits are widening, and two prime ministers have fallen trying to fix it. The question now hanging over politics in Paris: how much of the budget woes are due to French President Emmanuel Macron himself?
Since Macron entered the Elysee Palace in 2017 promising to cut taxes, boost growth and shrink the state, public spending has increased, and so has France's debt-to-GDP ratio, now behind Greece and Italy in the Eurozone.
Last year’s budget deficit reached 5.8 percent, the highest of any eurozone country. François Bayrou, the second prime minister this year to reject deficit plans, tried to craft a 44 billion euro fiscal package that will now almost certainly have to be scaled back by his successor.
The blame game between Macron's centrists and an angry opposition will make budget compromises difficult. The president's modernizing approach has yielded some results. Unemployment has fallen as strict labor laws have been eased, France's reputation as an investment destination has improved, and a raised retirement age to 64 has kept more older people in work.
But the left-wing Socialist Party, which is the key bloc for change if any government is to pass a budget, now wants Macron to make concessions that it sees as tantamount to giving up much of that legacy. The Socialists want to raise taxes on the very wealthy and suspend the president's hard-fought pension reform.
France's public finances can be explained by two factors, according to economists: its big-spending approach to cushion the impact of the Covid pandemic and the subsequent European energy crisis, but also the sweeping tax cuts undertaken by Macron since 2018.
Half of the increase in France's overall debt since 2017 was due to those permanent tax cuts, with crisis support accounting for the other half, estimated Xavier Ragot, who heads the OFCE expert group.
France has not balanced a budget since the 1970s. It has always been an exception among developed economies for the level of public spending, which at 57 percent of GDP in 2023 exceeded that of any other OECD member. It also has one of the highest taxes, with the burden falling mainly on workers.
For a long time, successive governments saw this as an acceptable policy choice, with relatively healthy productivity and GDP growth helping to prevent debt from spiraling out of control. Taxpayers were willing to support generous pensions and social security as part of the cherished French social contract, and they valued their public services.
Last year, 47 percent of all spending was spent on pensions, health and unemployment benefits, 20 percent on local government and 34 percent on the state budget, according to the finance ministry.
When Macron entered the Élysée Palace, debt was on a downward trajectory and the deficit was 3.4 percent of GDP, thanks to measures taken by his socialist predecessor François Hollande to recover from the 2008 financial crisis.
Hollande raised taxes on companies and families, but also created generous tax credits for research and development, as well as incentives for employment.
Macron abolished a wealth tax and replaced it with a more modest one on real estate, while taxes on capital gains were also reduced to a flat rate of 30%. Corporate taxes were cut from 33% to 25%, and production taxes that hurt competitiveness were curbed.
This led the left to criticize Macron as the "president of the rich," even though the elimination of a housing tax, which benefited all property owners, was among the most costly moves.
The tax cuts were largely unfunded because Macron's bet was that his policies would strengthen the economy and improve labor force participation, which would raise incomes and narrow deficits.
Then came a series of crises to which Macron’s response was to repeatedly remove the checkbook. First, the yellow vest movement erupted in 2018 over a proposed carbon tax on fuel, which angered protesters who felt his tax policy favored the wealthy.
Then the Covid-19 pandemic and the European energy shock hit each other in rapid succession, forcing the government to spend heavily on crisis support to boost workers' wages, keep companies afloat, and help families pay their bills.
While the Covid-19 response of 170 billion euros, or 10 percent of GDP, was not at odds with other countries, France continued to provide aid for longer than its counterparts under its mantra of “quoi qu'il en coûte” (whatever it takes).
During the European gas crisis, the government gave consumers and businesses unspecified subsidies for energy and gasoline. The French national auditor estimated the net cost to the state at 72 billion euros.
Economists say the fiscal stimulus was excessive. But the OFCE suggests the more lasting problem was a decline in tax revenues due to Macron’s previous decisions. Many economists did not foresee this because of the turbulence of the crisis years, which made forecasting difficult. Such challenges led the finance ministry to miss its own tax revenue forecasts last year, leading France to exceed its deficit target.
Given high tax rates, uncertain productivity growth and a stagnant labor market, economists say France will not be able to grow quickly or tax its way out of its fiscal impasse.
A sustained effort to cut public spending in many areas was needed, said Xavier Jaravel, president of the French government’s Economic Analysis Council. This includes health and education, where France’s higher spending has not led to better results than elsewhere in Europe. The task could be manageable if there was political support for gradual cuts over a number of years. But, given the gap that now divides political parties, reaching consensus will probably be impossible until the 2027 presidential election allows voters to choose./ Adapted from “Pamphlet” from “Financial Times”
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