Two years ago, Jean Marc Ayrault, then Prime Minister, following the conclusions of the Gallois report relative to French corporate sector competitiveness, set up substantial fiscal incentives (CICE), which were confirmed by his successor, Manuel Vals through the “Pacte de responsabilité”. The reduction of labor costs generated by these fiscal incentives, was supposed to give employers enough financial margins to invest, create jobs and allow France to come back to a growth path strong enough to reverse unemployment curve.
Nobody can ignore that, until now, these objectives have not been reached, but it could be argued that, as structural reforms, it will take more time to produce their effects. Last figures relative to current French budget and comments issued by the French finance Minister regarding fiscal receipts and tax reduction proposals for 2015 and 2016 can generate skepticism since a political debate will, sooner or later, emerge about the level and the efficiency of the tax cuts offered to enterprises compared with the growing pressure on households of income tax.
During the first seven months of 2015, direct taxes on households (income, wealth and registration taxes, death duties) increased by 8%, that is to say 4,5 billions. We will know soon if this trend will be reversed by the end of the year. In 2013, income tax reached 67 billions, 12 billions more than during the previous year, and 69 billions in 2014. Proposals for 2016 target several millions households through very small tax cuts but they give no insurance that the global level of the income tax receipts will be reduced or even stabilized.
Statistics published by the Finance Department regarding corporate tax disclose the opposite situation. Amount of Corporate Income Tax was 41 billions in 2012 and 47 billions in 2013 but, thanks partly to the CICE, it was reduced to 35 billions in 2014. For the first seven months of the current year, it has dropped by 37 % compared to the same period of last year, to 8,6 billons. During the same period of time, the amount of income tax paid by households was 48 billions.
Since 2013, the transfer of the tax burden from corporate to households, which was decided to, during the same period, reduce budget deficit and improve the competitiveness of French companies, has been spectacular. But with which results? Did French companies increase their margins and invest ? Did they regain competitiveness on foreign markets? Did they, since that was the ultimate purpose, create jobs? The analysis of the impact of the measures decided by the two successive governments provide us with some clarification about the relevance of this policy and of the economic sense on which this policy has been decided.
First of all, the profit margin of French companies has significantly increased. After stagnating around 29,5% since two years, INSEE revealed it has rebounded to 31% since the beginning of this year, reaching even 34% in the industrial sectors. But that happened without any consequences on investment which has been stagnant between 2011 and 2013, and just rose by 5 billions in 2014, an increase inferior to 1%. This number is to be compared with the amount (12 billions) of tax cuts received during that year. Naturally, self-financing rate which was around 75% in the past, increased to 80% during the last quarter of 2014 and reached 85% during 2015 first quarter.
So CICE went to increase corporate finances. But, until now, they did not use this flow of financial resources to invest, contrary to government expectations. And they did not profit from low interest rates, resulting from the ECB policy, to borrow. It is quite a paradox to see, in this context, an increase of self-financing rates but this shows, also, the limits of monetary policies to generate an economic rebound.
Did the French economic policy improve the competitiveness of French companies against their foreign competitors? Statistics provided by INSEE and Customs don’t allow us to conclude in this direction. Goods and services balance deteriorated by 9 billions between 2013 and 2014, even with, during the last quarter of 2014, a fall of oil prices. For goods only, in 2014,Customs numbers show a deficit reduction of 4 billions in spite of a reduction of the cost of the energy bill of 6 billions. During 2015 first half, trade deficit was again reduced by 8 billions, but with a 7,8 billions reduction of France energy bill. During the same time, the value of the euro against the dollar and the currencies which follow it, as the pound and the chinese yuan, fell by more than 15 %. Euro devaluation also should have contributed, with the tax package, to improve market shares of French companies. Nothing like that happened until now.
What about job creations, since it was the ultimate raison d’être of the CICE and of the Pacte de Responsabilité? During 2013 2nd quarter, the number of employees was 17,888 millions. After having oscillated around this level during a year and fell to 17,800 at the end of 2014, the number of employees did not yet recover to 2013 level and reached at the end of 2015 2nd quarter, only 17,847 millions. Economic policy followed by the government did not have a significant impact on employment.
Finally, the substantial fiscal incentives decided in favor of the corporate sector, which generated an increase of direct taxation on households, did not yet stimulate investment, competitiveness and job creations. But they increased margins and free cash-flows. It is possible to argue that “structural reforms” need time to produce their effects and that it is too early to have a definitive assessment. But this argument couldn’t be raised indefinitely and a two years period between an announcement and the assessment of the policies decided is not excessive. To be honest, these “structural reforms” have only few months ahead to prove they are appropriate. But the last published numbers of the French growth during the 2nd quarter (0%) and of the industrial production in July (-1%) are not encouraging.
If there is no substantial progress in the very near future, we will have to accept the fact that the tax credits procured to the corporate sector more windfall profits than real incentives and that the profits generated where used to increase their financial results and, in big companies, to redistribute them to shareholders and even, in some case, to their top managers as in the case of the controversial departure bonus given to former Alcatel-Lucent CEO.