Emmanuel Macron has spent his seven years as French president betting on tax cuts for the wealthy and corporations to stimulate the economy, but his new government is seeking to reverse that strategy.
With the country’s finances rapidly deteriorating, Prime Minister Michel Barnier, recently appointed by Macron, is paving the way for higher taxes on corporations and the wealthy as a last resort to plug France’s widening budget deficit and reassure worried international investors of the government’s ability to solve the problem.
Macron is under pressure to act quickly. Borrowing costs in France, Europe’s second-largest economy after Germany, jumped to their highest level since the 2008 financial crisis on Tuesday after investors raised the premium they were asking to hold French bonds, leaving the government struggling to rein in debt and deficits that have ballooned to Europe’s highest levels.
Mr Barnier warned on Sunday that France’s fiscal situation was rapidly deteriorating and said he would broach the long-taboo topic of reversing some of Macron’s signature tax cuts, despite the president promising only weeks ago not to raise taxes.
“We are not going to raise taxes for all French people,” Barnier said in an interview on French television, “but we cannot exclude the wealthy and corporations from the national effort to improve the situation.”
How did France get to this critical point?
Macron is known as the “rich man’s president.”
Since first being elected president in 2017, Macron has made strengthening France’s reputation as a business-friendly place to do business a hallmark of his presidency. He has slashed taxes on corporations and curbed the country’s wealth tax, winning praise from investors but earning the nickname “president of the rich” from critics.
Macron’s tax package included cutting the corporate tax rate from 33% to 25%, reducing taxes on manufacturing and industry that were once among the highest in Europe, turning generous temporary employment tax cuts for companies into permanent cuts, and introducing a flat 30% tax on investment income.
Macron sparked controversy by replacing a wealth tax on the super-rich with a tax on real estate assets worth more than €1.3 million.
The aim of the tax policies was to stimulate growth by encouraging wealthy investors to invest more in the economy and encouraging businesses to hire more. But critics say they have primarily exacerbated economic inequality and deprived the national treasury of revenue. Together, the policies have cost the French treasury nearly 15 billion euros in lost revenue, according to a study by the Institut Montaigne, an independent French think tank.
The Prime Minister is moving towards raising taxes.
Mr Barnier needs to make a staggering 110 billion euros of savings over the next few years to bring France’s ballooning debt and deficit back into line with European Union rules, much of it in the form of cuts in government spending.
Macron has been a vocal opponent of tax hikes, calling the urge to do so “a very French disease,” but Barnier has suggested he has no other choice. So far, Macron has not said what tax hikes he would consider. But in interviews in recent days, he has said he and his new cabinet are willing to cross some of Macron’s red lines.
Among the measures under consideration is raising the flat tax rate up to 35%, a change French economists say could bring in up to 300 million euros in new revenue.
Also being considered is a temporary tax on “excess profits” made by companies – a plan proposed by Mr Macron but abandoned several years ago as profits for oil and food companies soared after the pandemic – and some in Mr Barnier’s camp have floated the idea of keeping corporate tax rates close to the levels before Mr Macron cut them.
As for bringing back a wealth tax, Barnier declined to say whether it was planned, but French think tank Terra Nova said that if the government were to reinstate it and cut other tax loopholes, it could raise 10 to 15 billion euros a year in revenue.
French companies support tax hike, but with conditions.
Patrick Martin, head of Medef, France’s leading employers’ association, said he was “ready to discuss” higher taxes on companies, provided the government made deep cuts in spending and did not implement policies that would stifle investment and employment.
And Rodolphe Saade, chief executive of shipping giant CMA CGM, said his company was ready to make a lump sum payment to help France restructure its broken finances, suggesting that big companies may step down to plug budget holes unless there are further major changes to tax laws.
“If there is a solidarity contribution by profit-making companies, CMA CGM will pay part of it,” he told a press conference on Monday.
Foreign investors have so far remained quiet, but the new government is particularly careful not to scare them off. Mr. Barnier’s new budget minister is Laurent Saint-Martin, the former head of Business France, the quasi-governmental body tasked with attracting investment. Mr. Barnier also named Antoine Armand, a liberal politician close to Mr. Macron, as the new economy minister.
What happens next?
Public finances are deteriorating faster than expected. The French Treasury projects the budget deficit will reach 6% of economic output in 2024 unless the government takes urgent action, up from a recent forecast of 5.6%. France’s debt has ballooned to €3 trillion, more than 110% of gross domestic product, the highest in Europe after Greece and Italy.
After missing a deadline last week, Barnier is due to meet political and business leaders this week to draw up a blueprint for a budget to present to EU officials. He now faces a Tuesday deadline to show how France will get its finances in order.
