Calls for tax hikes: France’s unplanned billion-dollar hole

MBruno Le Maire is, as usual, omnipresent in the editorial office these days. A visit to the Renault plant in Normandy, a trip to a solar power plant in Provence, a reception from Robert Habeck and his Italian counterpart in Paris next Monday – one public appearance follows another from the French finance and economic ministers. He usually gives accompanying interviews to the local press every week, while his ministry has been rejecting the WZZ’s proposals for negotiations for months.

Le Maire also recently published a book again. After last year’s erotic romance, this time it’s a sober non-fiction book called The French Way. In it, Le Maire presents his vision for the country, as well as his own political ambitions, and calls for a move away from an overly generous welfare state; He has never hidden his desire to succeed President Emmanuel Macron in 2027.

As custodian of France’s cash-strapped treasury, Le Maire is now under enormous pressure to demonstrate and deliver on her political skills. Instead of the planned 4.9 percent, the budget deficit last year was 5.5 percent, the Office for National Statistics confirmed last week.

The head of the French Court of Audit, Pierre Moscovici, spoke of a “very worrying situation in public finances” and a “problem of trust” within the eurozone. Moreover, the 4.4 percent target for this year also became shaky after Le Maire was forced to revise his optimistic economic growth forecast from 1.4 to 1.0 percent. Even if sustainability is not seriously threatened, the national deficit must now finally be balanced, Moscovici warned.

Again about twice

Against this background, criticism of Le Maire’s presence in the media is inevitable. His book had many ideas. “It’s a pity that the author is not the Minister of Economy,” Macron allegedly joked, according to the business magazine Challenges. The head of the French central bank, Francois Villeroy de Gallo, also expressed clear criticism. “For fifteen years, our country and its successive governments have failed to meet their long-standing commitments to balance” state budgets, he said last week.

The warnings are not accidental: between the end of April and the end of May, the three most important rating agencies – Fitch, Moody’s and S&P Global Ratings – assess the creditworthiness of the French state. A downgrade could make borrowing from financial markets more expensive and would severely limit the government’s already limited ability to distribute credit.

France currently pays about 2.9 percent interest on ten-year bonds. This is almost half a percentage point higher than in Germany and is therefore still a long way from the almost 2 percent achieved during the European debt crisis, but three years ago this “spread” was still about half of today’s value.

Declining economic growth and dwindling tax revenues now force Le Maire to plug an unplanned hole in the French government budget. More than 10 billion euros worth of loan approvals have already been cancelled, but the ministry says the savings needed for upcoming budget planning are about twice that.

However, how this will be achieved remains completely open. “We can certainly save public costs without going into the pockets of the French,” Le Maire told RTL radio. There is no question of raising taxes for him. “I refuse to give in to the complacency that comes with difficult times,” the minister added in a guest article by business newspaper Les Echos.

Top 10 percent of French taxpayers account for three-quarters of income tax revenue, a special levy introduced in 2011 on high incomes is still in effect, and the marginal tax rate has reached a record high of 60 percent in Europe. An even greater turn of the fiscal screw would jeopardize the economic policy gains of recent years and represent an escape from difficult debates about cutting public spending, Le Maire argues.

However, the tax debate is far from over. On the one hand, Prime Minister Gabriel Attal said in a recent television interview that the additional burden on the middle class and companies is a “red line.” However, earlier this week he announced that a working group would be convened by June to develop proposals for an as-yet unspecified tax on “windfall profits.”

Attal is responding to demands put forward not only by left-wing opposition parties, but also by the ranks of the presidential majority. It also includes higher taxes on share buybacks and capital gains or the suspension of a promised cut in the production tax, which is levied regardless of profits and has long been a thorn in the side of French employers. There is also discussion about reintroducing a wealth tax, which was converted into a pure estate tax at the start of Macron’s term.

In mid-April, Le Maire wants to present key figures on how the deficit can be reduced below the European target of 3 percent by 2027. The planned savings are due at the end of June, after the European elections.