While the current trajectory of public finances in France worries the French court of auditors, the Council for Economic Analysis recommends drastic fiscal measures, including the removal of harmful taxes and providing some tax relief. EURACTIV France reports.
France’s public finance trajectory was off to a pretty good start, with reforms initiated by President Emmanuel Macron even being praised by the European Commission in 2018.
However, in the meantime, the ‘yellow vest’ crisis, the ‘great national debate’ and the ensuing appeasement measures have slowed progress, according to the French court of auditors, which warned of an illusory reduction in public deficit for 2020.
The government announced a series of measures to calm social tensions, for a total estimated amount of €17 billion, according to the finance ministry. In December, tax cuts worth €10 billion were announced, which was followed by a further €6.5 billion in measures to re-index pensions on inflation and additional tax cuts for households.
According to the court of auditors, these measures cannot fully ensure the intended reduction of public spending by 2%.
In 2019, public deficit is expected to reach 3.1% of GDP, mainly due to corporate taxes having been permanently reduced, which slightly increased the public deficit, particularly in the medium-term.
“The 2020-2022 trajectory, which does not take into account measures announced at the end of April following the ‘great national debate’, is affected by many weaknesses, differences compared to our neighbours and is not consistent with the public finance programming law of January 2018,” the French court of auditors stated.
It also noted the deterioration of France’s public finances, especially compared to other eurozone countries. Another area of concern for auditors is France’s global public debt, which will see an additional increase in 2019, while it is decreasing in other European countries.
Reducing corporate taxes is not the most optimal solution
While France recently set in stone the reduction of corporate taxes, meant to be key to economic recovery and healthy public finances, the state’s Council for Economic Analysis is proposing to tax companies differently.
France has one of the lowest collection rates of corporate tax in relation to its GDP compared to other European countries. It’s probably the high tax rate that encourages companies to do complicated gymnastics to avoid it.
“In France, there are both a lot of subsidies and a lot of corporate taxes for companies: we have to clean up,” said Philippe Martin, director of the Council for Economic Analysis, whose organisation carried out an assessment of corporate taxes in France.
It shows that several taxes are more harmful than anything else, which ultimately weighs on the tax levied on companies and limits their profitability.
These taxes are mainly those relating to the equity capital of companies. They include the property contribution of companies, which affects all companies, the value-added contribution for companies (CVAE) and the social solidarity contribution of companies (C3S). Economists are particularly critical of the latter.
“It is a small tax of 0.11%. However, it has harmful effects because it encourages companies to integrate functions that could be outsourced upstream and it is a subsidy on imported goods as it does not exist in other countries,” Philippe Martin pointed out, calling it a “stupid” tax.
At each stage of production, the tax itself actually gets taxed, which has a snowball effect on the price of the final product. In other words, it is as if the country was imposing a customs duty on its own products.
Created in 1970, the tax now only applies to companies generating an annual turnover of more than €19 million but continues to be penalising as it mainly affects the competitiveness of companies that export.
Rather than introduce sustainable wage cost reductions, the Council for Economic Analysis is, therefore, proposing to scrap the tax, which would allow a GDP increase of €370-700 million.
The state body also proposes to abolish the value-added contribution for companies, which is the second largest tax paid by companies in terms of amount and whose effectiveness remains doubtful.
“It puts pressure on the wage bill for low-skilled jobs, while the unemployment rate is high for this population,” said Alain Trannoy, an economist at the French School for Advanced Studies in the Social Sciences (EHESS) and co-author of a study on production taxes.
On the other hand, qualified posts, which are better paid, pose less of an unemployment problem and are benefitting from tax cuts since the tax credit on competitiveness and employment (CICE) was recently cut off.
On paper, this is benefitting exports, yet the Council for Economic Analysis is suggesting, on the contrary, to restore the corporate taxes.
It also proposed that the government should abandon the social solidarity contribution of companies, the value-added contribution for companies, as well as the reduced VAT rate for the catering industry, which did not end up creating the jobs intended.