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It is not an easy situation for one to propose a deep economic reform plan on the French political scene. The country’s economy presents a series of pediatric diseases that are classically the result of excessive state intervention.
French government spending reaches 56 percent of GDP, bringing the country to the top of the podium in Europe.
By comparison, for the euro area, this figure averages 47 percent. Of course, such a high level of spending can be financed with a high enough tax level. It is questionable to what extent France’s tax system, which also largely bypasses Scandinavian countries in redistribution, encourages wealth creation, or, on the other hand, to what extent the very weak French economy can be blamed. by the current state.
One thing is certain, if the growth rate of public spending exceeds the growth rate of the economy (with tax revenues as a percentage of GDP unchanged), the budget balance will also deteriorate. Over the last ten years, we have witnessed this process, with a budget deficit of around 4%, one percentage point above the maximum of 3% caused by the EU’s excessive deficit procedure.
This, of course, resulted in a gradual increase in the level of public debt from 85% of GDP in 2010 to 98% in 2017.
– in comparison, the Hungarian data for 2017 was 73 percent.
High public spending and budget deficits have a crowding-out effect on private investment, which is presumably also to blame for very poor economic performance. On top of all this, thanks to very inflexible labor market regulations, French unemployment hovers around 9-10.5 percent for a decade. Youth unemployment has been even more severe, around 25 percent over the past decade. The picture also spoils that
almost a fifth of the workforce works in the public sector,
which can also be blamed for the brutal drop in public spending.
The great plan
In 2017, Emmanuel Macron’s program excellently identified the issues mentioned above. The president set a goal
- reduce the budget deficit,
- layoffs in the public sector,
- cuts in budget spending,
- make the labor market more flexible,
- reform of the tax system.
The president was not in an easy position, as France is famous for the fact that the very active trade union movement rewards even the slightest effort to liberalize with strikes and serious demonstrations. It’s no secret, the expected paper format has prevailed for the past three years,
the great plan of economic reform encountered serious social resistance.
But let’s take a good look!
Early in his presidency, Macron decided to introduce a property tax with a much smaller tax base instead of the previous property tax, as he promised. The measure reduced tax revenue by roughly 70 percent. The president justifies the move on the grounds that a wealth tax of more than 1.3 million euros will only cause the wealthy strata to leave France, as New World Wealth’s research shows. According to the study, approximately
60,000 millionaires left France as a result of the wealth tax.
The introduction of the tax in 2016 suggested moderate wisdom, with the economic consequences of the measure being severe, while the tax “collected” only 2 percent of total tax revenue. It was not very popular among people with more left-wing emotions than in the budget approved in 2017, the tax paid on capital gains, dividends and interest was also fixed at a flat rate (30 percent).
The transformation of the labor market began on two fronts. The first was the reform of the unemployment benefit system.
Macron has restricted access to aid,
It increased the duration of required employment, after which the unemployed can apply for state aid if they lose their job. In addition, the president reduced the amount of aid for the richest workers, who had previously been able to pay up to 6,600 euros a month (almost 2.5 million HUF) in the form of unemployment benefits. The reform of the system was justified, among other things, by the fact that the French state has very generous unemployed citizens, the unemployment benefit lasts for two years, and its average value is around one thousand euros per month (about 360 thousand florins).
The other front of the labor market reform was the reform of the labor code. The measure reduced the leeway for unions, lowered penalties for employers sued by former employees, and simplified the terms of collective layoffs. As a result of the steps, the high unemployment rate, which has been high for decades, has fallen by around two percentage points to less than 8 percent. Of course, looking at the result, the question may arise how successful we can consider labor market reforms. Unemployment remains exceptionally high at the European level, while the youth unemployment rate remains at 20 percent.
In any case, the reform was not received with much enthusiasm, and the hardline CGT union announced its intention to protest even before the government made the details of the program public.
The French president has made more modest progress in reducing the budget deficit. Admittedly, compared to the 4% deficit mentioned decades ago, the deficit has averaged 2.7% over the past three years, while budget cuts after the yellow vest demonstrations have increasingly jeopardized plus the achievement of the 2022 budget surplus. The goal was made practically impossible by the economic crisis caused by the coronavirus. Macron’s plans were not primarily aimed at reducing budget expenditures, but at slowing the growth rate of budget lines (which was also successful in municipal and health expenditures). In addition to the recovery in economic growth, the strategy followed could lead to a reduction in the general government deficit, but the reforms that have been carried out have not stimulated the French economy to such an extent that we have seen significant growth in recent years. three years.
Demo reforms
One highlight of the budget balance improvement measures was the increase in fuel taxes, which in November 2018 was the cause of the yellow vest demonstration series. The protesters caused major damage in Paris, and the mood could only be clouded by concessions made by the French government. In December 2018, the French president backtracked, the planned tax increase was reversed, and the government decided to cut personal income taxes and raise wages for the poorest workers as part of a € 10 package. billion. The package budget was increased by an additional € 5 billion in April 2019. The program was financed by postponing the promised reduction in corporate income tax and cutting other budget lines.
The president also had trouble reforming the pension system. The reform package announced last December would have standardized the 42 types of pension plans available in France and introduced a single points system that would have provided the pension received to the beneficiary’s previous contributions. It is true that the pension proposal would have raised the retirement age for most professions (currently 62 years).
The proposal was followed by the longest wave of strikes in modern French history,
the series of events lasted from December 2019 to February 2020. Negotiations between unions and the government have been postponed due to the spread of the coronavirus, and discussions will continue into 2021. According to a January poll by conservative weekly Le Figaro, 61 per cent of the French population considered the strike wave justified, making it unlikely that the proposal will go smoothly next year.
The epidemic only adds to the problems
The economic crisis caused by the coronavirus also did not spare France, with GDP falling by almost 14% in the second quarter compared to the same period last year. This was the third consecutive quarter. The government forecasts year-end figures to be around minus 11 percent. The economic recession could easily reverse the downward trend in unemployment, while the economic rescue package adopted by the government, worth a total of € 250 billion, places a significant burden on the budget. The value of the stimulus kicks in at 10 percent of GDP.
Analysts say that French government debt will reach 120 percent of GDP by the end of 2020.
All of this is a major blow to the president’s economic reform plans.
Reduced room for maneuver
The situation is exacerbated by the fact that Emmanuel Macron’s political room for maneuver is shrinking as the 2022 elections approach. Support for Marine Le Pen, the main challenger, is almost 10 percentage points higher than the candidate’s support in 2017, according to survey data. Programs that provoke very high levels of social resistance, as well as discontent with the epidemic situation, could easily result in competition in 2022 being significantly tighter than we are used to based on the last elections.
Although Macron’s reform plans perfectly identified the structural origins of France’s economic problems, the implementation of the plans and the concessions made following the Yellow Vest demonstrations have severely deviated France from the trajectory originally set by the president.
The economic crisis caused by the epidemic is almost undoing the measures aimed at improving the budget balance, and unemployment could easily begin to rise against the downward trend of the last three years. The unprecedented French experiment has ended due to the epidemic, but we can be sure that if Emmanuel Macron is re-elected, the issues mentioned above will be discussed again and we will not run out of demonstrations even after the 2022 elections.
(Cover image: French President Emmanuel Macron addresses the press at the MED7 Group summit, which brings together Cyprus, France, Greece, Italy, Malta, Portugal and Spain, in Ajaccio, Corsica, on September 10, 2020 .
MTI / EPA / AFP / Ludovic Marin)
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