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Observations on the French 2018 Finance Bill: What Possible Future for the Country’s Finances?

ARTICLES - 10 January 2018

On November 21st, 2018, the French National Assembly voted the 2018 Finance Bill. Because it is the first one of a five-year term, it is coupled with a Programming Bill which outlines the budget trajectory for the four years to come (2018-2022).

What can one reasonably expect from such publications? What is the current standing of French public finances and how are they expected to evolve over the next five years?

The 2018 Finance Bill in five key figures

Among the key figures of both publications, five deserve special attention:

  • 1.7%: growth forecast for the 2017 to 2021 period (1.8% growth rate expected in 2022) ;
  • 2.9%: public deficit as a percentage of GDP for 2017. It is expected to increase to 3% in 2019, due to the transformation of the tax credit for employment and competitiveness (CICE) into a permanent cut in payroll taxes. In 2019, a cost overrun of €20bn is expected due to the simultaneous payment of the CICE and of its replacement, a boon for companies. The general government deficit should then decrease and reach 0.2% in 2022 ;
  • 54.6% of GDP: public expenditures as a share of GDP which are projected to decrease down to 50.9% of GDP in 2022;
  • €3.2bn: fiscal cost of reducing the scope of the wealth tax (ISF) to real estate assets only (IFI); and
  • 30%: rate of the flat tax on capital income which will take effect in 2018 and is expected to reduce tax receipts by €1.3bn euros in 2018, and €1.9bn in 2019. To date, capital income are subject to both income tax and social security contributions. The combination of both levies can potentially lead to a marginal capital tax rate of 60%. The flat tax can thus be understood as a clarification tool, as well as a decrease in capital taxes.

An overview of the French government’s roadmap

The 2018 Finance Bill, unveiled this past September by the government, rapidly got challenged. In October, the Constitutional Court invalidated a tax on companies’ dividends, implemented by the previous government, which had generated a tax revenue of €10bn. The current government has been asked to reimburse this amount to all companies concerned, and will do so for half of the amount (€5bn), the other half being covered by the companies that were previously subject to the original tax. 

Nevertheless, the government has not lowered its ambitions for general government deficit reduction: in an Amended Finance Bill, presented to the Council of Ministers this November 15th, it has maintained its deficit forecasts. The latter should reach the “symbolic” level of 3% in 2017, and remain below this figure in 2018. 

For the four years to come, the government has announced several measures which can be classified into two trends:

  • Simplifying and decreasing taxes: applied to households, it is illustrated by the end of the wealth tax (ISF) in its present form, the progressive abolition of housing taxes (TH), the flat tax on capital income and the decrease of employers’ contributions and increase of the generalized social contribution (CSG), a broad-based income levy designed to fund welfare transfers. As for companies, this trend is seen through the projected reduction of the corporate tax rate (IS) from 33% in 2017 to 25% in 2022, the end of the tax on companies’ dividends and, finally, the replacement of the CICE by a permanent reduction in payroll taxes, a boon for companies. The overall aim of the government is to decrease the proverbial “tax burden”: France is currently the EU champion in terms of mandatory taxes and other contributions. By way of comparison, in 2015, the gap between the tax burden ratios of France and the EU was 6.7% percentage points of GDP (from 4.4% in 2008). According to the 2018 Finance Bill, this tax ratio represents 44.7% of GDP in 2017 and must decrease down to 43.6% of GDP in 2022;
  • Cutting government spending, especially operating expenditures: the government has committed to cutting 120,000 jobs in the public sector between 2017 and 2022 (in 2017, only 1.600 jobs have been suppressed, thus questioning the 5-year target). 5.45 million employees are working in the Civil Service, according to 2015 figures. According to Institut Montaigne, achieving the 120,000 headcount reduction target would save €3.17bn per year. In October 2017, the Comité Action Publique 2022 (CAP 2022), a committee spanning the public and private sector and gathering over 30 public figures was tasked with the mission of streamlining public expenditures. It is expected that reform proposals will point towards structural efforts, a move which the European Commission will most likely welcome.

The skepticism of the European Commission

In light of these recent announcements by the French government,the European Commission took an official stance and warned France that, for the time being, the announced measures are far from sufficient.  

It is worth noting that the European Commission acknowledges some positive evolutions in its last report: the French budget path is deemed “plausible”, especially the decrease of general government deficit and the keeping of the 3% deficit cap pledge. For the first time since 2009 and the aftermath of the GFC, France will be in a position to exit the procedure for excessive deficit as early as 2018.

However, despite this current improvement, serious questions remain to be answered. The European Commission warns that the current improvement in France’s public finances is mainly due to an upturn in the global economy. Furthermore, the European Commission cautions that substantial efforts still need to be made on public expenditures, since cyclical improvements will not be enough to compensate for France’s structural misconducts (according to the OECD, public expenditures have risen from 51.1% of GDP in 2000 to 57.1% in 2014 – top year –).

The EC manifests its skepticism regarding France’s structural reforms, which the country should have implemented in order to meet the EU requirements. The Fiscal Compact (Fiscal Stability Treaty), signed in 2012 by all member states of the EU but three (Croatia, Czech Republic and the UK), required a structural deficit below 0.5% of GDP. Yet, the 2018 Finance bill shows that France is far from reaching this target, with a structural deficit reduction of 0.1% of GDP, way too low compared to the EU target (0.6% of structural adjustment required). A similar observation has also been made by the French High Council for Public Finances (HCFP), in September 2017.

Indeed, cyclical improvements are helping France meet its overall public finance targets: however, Brussels is still asking significant structural reforms of France, which are yet to be seen.

Institut Montaigne’s plea for a reduction of public expenditures

In its 2015 report titled Dépenses publiques : le temps de l’action (Public expenditures: time for action), Institut Montaigne supported a cut in public expenditures,as opposed to increasing taxes which was the main policy option previous cabinets had prioritized in the last decade. With that objective in mind, Institut Montaigne identified key expenditure items allowing the government enough “room for maneuver”: operating expenses, local communities’ expenses, better steering and evaluation of current expenses.

Despite notable efforts during the first year of his presidency, Emmanuel Macron still needs to tighten his control of public expenses. The French government will not be able to check France’s budget balances by only relying on an improved economic environment; nor will it do so by simply increasing taxes and relying on the comfort provided by higher revenues.

Last but not least, Institut Montaigne advocates for a compliant France, one which meets its European commitments and plays its fair share of contributing to European integration and stability. It is a matter of credibility and responsibility for a country which claims to be one of the two leaders of the European construction.

 

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