French Elections Round-Up Part One: Squaring the Circle of French Fiscal Policy

Socio-economic issues will be of central concern when the French elect a new president on April 23rd and May 7th. In this mini-series, the GED project will present to you not only the most pressing issues at stake, but also the corresponding solutions each of the five main candidates proposes. In a first take, we will take a closer look at France’s overall economic situation as well as at its fiscal policy. For an in-depth analysis, also take a look at our recently published Focus Paper. 

Want to read ahead? You can click here or here to go directly to this mini-series’ second and third installment.

Making Promises under Constraints

During an electoral campaign, any politician will want to articulate a positive vision for the future of his country. Central to the campaign will be new policies and improved measures likely to attract voters. But of course, campaign promises tend to be costly. And politicians will also want to avoid being seen as irresponsible with public finances. Solving this trade-off is difficult enough in normal times. But the French electorate is increasingly aware of the pressure on the country’s public finances. As you can see in the chart below, the ratio of public debt to GDP has been exploding since the financial crisis. Yet at the same time, the OECD ranks France among the countries with the highest tax wedge on salaries and with sluggish investment.

Just as it is impossible to square a circle, it is impossible to reduce debt, deficits and taxes while boosting investment and ensuring social cohesion. The solutions proposed by the candidates reflect thus their policy priorities and make clear where the emphasis of their manifesto lies.

Fiscal Policy Challenges

National debt has risen considerably over the last two decades and is at 96.2 percent of GDP (2015) but is forecast to surpass 100 percent in the near future. While an overall strong economy with a healthy demography such as France is capable of sustaining a relatively large burden of public debt, there are essentially two dangers associated with this. First, the country expanded its public debt massively – by 34 percentage points – between 2007 and 2015. Much of this debt was issued at comparatively low bond yields, which arose from a flight to quality prompted by the European sovereign debt crisis and the quantitative easing programme of the European Central Bank. The latter is likely to be retrenched over the coming months or years, which will lead to a general rise in bond yields. The extraordinarily good refinancing conditions for France[1] are thus not likely to persist in the long run, hence it will be hard to keep debt service costs at the current relatively low level of 10.8 percent.

These dangers associated with France’s high public debt imply a need to get the large budget deficit under control. France has been placed under the surveillance of the European Commission as part of the Excessive Deficit Procedure since 2009. While still breaching the Stability and Growth Pact (SGP) ceiling of 3 percent, it has improved its structural balance between 2013 and 2015 by 1.9 percent. This falls short of the 2.1 percent target but still represents a considerable reduction. In light of this effort, “[t]he evidence did not lead the Council to conclude that no effective action had been taken”. Thus, the period for correcting deficits has been extended to 2017. The new targets set by the Council for 2015 were 4.0 percent (actual 3.5 %) and for 2016 3.4 percent (actual 3.3 %). The deficit is forecast by the European Commission to fall below the 3 percent ceiling in 2017. Whether this fiscal consolidation can be maintained is a different question. Out of the five main candidates, three propose to reduce the tax burden and all, except for François Fillon, plan higher spending on public investment. In the medium term, there is some scope for further economies in public expenditure through a streamlined subcentral government, a more efficient organisation of the healthcare system and reduced unemployment. In the short term, it is not out of the question that deficits will widen again, as a result of the adjustment process.

Solutions Proposed by the Candidates

Jean-Luc Mélenchon

Mélenchon is the most left-leaning candidate with a radical manifesto. Inter alia, he rejects the fiscal rule framework of the European Union, which he accuses of forcing countries into austerity. He would even be prepared to leave the EU to avoid being bound by it.

The redistributive measures, the higher public investment and the lower retirement age proposed by Mélenchon imply a sharp rise in public expenditure. He wants to finance these through a reformed taxation system. He proposes to close current loopholes, to subject capital gains to the same tax rates as wages, to boost the existing wealth tax and to raise the inheritance tax. He also proposes a 90% income tax on earnings above 400.000€. Mélenchon also proposes to renege on a part of the public debt and to call on the French central bank (Banque de France) to finance further fiscal expansion.

Benoît Hamon

Coming from the left wing of the parti socialiste, Hamon’s manifesto points in a similar direction to Mélenchon’s. He, too, wants to redesign the fiscal governance of the Eurozone – while he does not propose to abolish its fiscal rules, intends to weaken them (by excluding spending on defence and migrant accommodation from the calculation) in order to end austerity. He also proposes a mutualisation of European debt and a common Eurozone budget that would be decided by an assembly composed of national parliamentarians (80%) and members of the European Parliament (20%).

Another core proposition of Hamon is his universal income. He intends to finance this measure through reconfiguring the tax system more progressively and simplifying it. He therefore plans to inter alia combine several groups of taxes and introduce further tax tranches.

Emmanuel Macron

Macron, a centrist candidate, wants to respect the European deficit rules by reducing public spending at least down to 3 percent of GDP. He therefore intends to save € 60 billion by 2022: € 25 billion in social spending, that is in the health sector and due to an expected decline in unemployment to 7 percent by 2022; € 10 billion by cutting the outgoings of local authorities, and finally €25 billion by decreasing government spending, due to further digitisation of administration and cutting the number of civil servants by 120,000 over five years, except for sectors such as defense and national education. An integral part of Macron’s programme is an investment plan amounting to € 50 billion. Over five years, € 15 billion would be invested in education and skills training, especially of the young and unemployed; € 15 billion to deal with ecological change and energy transition. Finally, € 5 billion each for agriculture, public health, public transport and the modernisation of public administration. Local authorities would also profit therefrom, such as to deal with the structural changes they are facing. Macron further wants to abolish housing taxes for 80 percent of the French, intends to add a 13th month salary to the minimum wage, which would give an extra € 100 per month, and wants to introduce the option of individual taxation. At corporate level, he wants to decrease corporate taxes from 33.3 percent to 25 percent. He further intends to introduce a one-time 30 percent tax on capital gains.

François Fillon

François Fillon, candidate of the centre-right party Les Républicains, proposes the most market-orientated manifesto France has seen in years. His aim of liberalising the French economy is also clearly visible in his fiscal policy. A central element of his ideas is to reduce the public deficit from currently 3.4 percent to below 3 percent in 2019. He plans to cut public spending by € 100 billion over five years and therefore to reduce the share of government expenditure in GDP from 57 percent to under 50 percent within the next five years. To achieve this, he inter alia plans to reduce the number of public servants by 500,000. In order to boost productivity, he wants to leave private sector working hours to negotiations of the social partners and to raise public sector working hours to 39 hours per week. This would offset the jobs cuts and thus keep the functional capacity of the public service unchanged. Fillon equally plans to gradually raise the retirement age to 65 and to reduce spending on public health. He says these two measures would each save another € 20 billion.

Fillon intends to use these savings to finance tax cuts. He proposes simplifying and cutting social security contributions as well so as to lower the cost of labour by € 25 billion. He wants to reduce the tax burden on companies by € 44 billion annually, reduce income tax progressively and scrap the 75 percent tax rate on incomes over € 1 million introduced under president Hollande. In addition, he proposes a harmonisation of corporate taxes at European level so as to avoid tax competition for multilateral companies.

Marine Le Pen

The far-right candidate Marine Le Pen of the Front National is the least specific about her fiscal policy. While promising to put public finances “in order”, she also promises various expenditures and tax cuts. In terms of tax policy, Le Pen is committed to lowering taxes for smaller and medium enterprises for which the relevant tax rate would be cut to 24 percent. Similarly, she intends to lower income taxes for the three lowest tax brackets by 10 percent. The expected revenue shortfall would supposedly be offset by savings to the tune of € 60 billion over five years. These are to come from lower spending on policies supporting immigration and from renegotiating on payments to the EU budget. She is also in favour of financing the public debt by printing money, rendered possible by leaving the Eurozone.

Want to read ahead? You can click here or here to go directly to this mini-series’ second and third installment.

[1] The average French bond yield has fallen from 4 percent in 2008 to 2.5 percent in early 2017 (European Central Bank 2017).

Selection of Sources:

Council of the European Union. France gets two more years to correct its government deficit. Press release. Brussels 10.03.2015.

European Central Bank. “Statistical Data Warehouse.” Frankfurt, 2017.

Eurostat. Eurostat Dissemination Database. Luxemburg 20.03.2017

Légifrance. LOI n° 2016-1917 du 29 décembre 2016 de finances pour 2017 (1). Journal officiel de la République française n°0303 du 30 décembre 2016 texte n° 1. Paris 2016

OECD. OECD Economic Surveys: France 2015. Paris: OECD Publishing, 2015.

—. Taxing Wages 2017. Paris: OECD Publishing, 2017.