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AB 2000 studies

Alain Boublil Blog

 

France : the new economic challenges

After the French president set the course of his action for the next five years and the Prime minister presented to the Parliament the main thrust of his economic policy, two questions need an answer: on which trend the French economy is today? Are considered actions appropriate to cope with the challenges the French economy is confronted?

During the 1st quarter, growth estimation has been revised upward twice, from 0.3% to 0.5%. But in the INSEE calculus, the key element, volatile by definition, was the constitution of high inventories which hardly offset the negative contribution of foreign exchanges. Banque de France has maintained, regarding the 2nd quarter, a 0.5% target which would permit to reach, for the full year, a 1.5% growth rate, a significant increase compared to the quasi-stagnation of last three years. But that result is very poor, due to what would be expected with  such a favorable international environment. Especially, it wouldn’t be enough to generate a significant reduction of unemployment. Anyway, it is revealing that neither the president nor his Prime minister did set precise targets on that issue. They are not doing the same mistake than François Hollande. Jobs creations in 2016 as since the beginning of the year are around 200 000 on an annual basis but they are not large enough to provoke a significant reduction of the number of job seekers.

That number staid roughly flat since the beginning of the year but the increase in May (26 000 more jobs seekers) reminds us that the course is still long before recovering the virtuous way of a significant and durable reduction of unemployment which would generate a comeback of thrust among households which would be enough to incite them to modify their economic behavior in a direction which would support growth. In May, goods consumption rebounded (+1%) but that hardly offset a very poor start of the year. Industrial production and corporate investments were more dynamic with a 2% growth year-on-year but they still are heterogeneous. Aerospace industry, car equipments and chemical enjoy a real rebound but the traditional strong sectors of the French industry as pharmaceutical and food are hardly following the trend. House building and public works, despite of the rebound of home building, are, on the opposite, stagnating. These divergent trends bring the proof that argument about the competitiveness of the French economy, which should be solved through a general reduction of enterprises fiscal and social charges, is far from being convincing, even if these ones enjoyed a real increase of their margins.

Foreign exchanges situation is strengthening these doubts. The 4.9 billion May deficit is in progress compared to the catastrophic results of the 1st quarter. But France is on a 60 billion annual deficit trend, the same than in 2012 and 2013, when oil price was above 100 dollars per barrel. The whole benefit resulting from the fall of oil price along with other raw materials as natural gas, has been lost. The economic policy, whose first priority was to improve competitiveness, did not bring, on the contrary, any improvment on our foreign exchanges.

National Accounting Office, as every year when ministers are preparing their budget has published an alarming report regarding public finances situation and has indicated that it will be difficult, for the State and the public administrations to return to a deficit inferior to 3% of GDP and to comply with our European commitments. These warnings were addressed to the new government when it was announcing the main points of its economic strategy. The publication of the budget implementation figures at the end of May shows the importance of the dilemma to which it is confronted. On the contrary to previous declarations, there is no slowing of the State expenditures, as employment costs, current expenses or interventions are concerned. They increased by near 5%. That rise was offset neither by the reduction of the cost of the debt, nor by the strong reduction of investments or of the transfers to local authorities. Regarding receipts, the effort is born by households who will have a 7 billion increase of their different taxes. Income tax will bring in the State coffins in 2017 73.5 billion when corporate tax will remain under 30 billion. The first five months figures are consistent with these forecasts.

At the end, growth is rebounding, without reaching a level which would permit to have a durable fall of unemployment but France has still to cope with a worrying twin deficit, the trade deficit which is increasing, even without taking into account the energy bill, unless our European neighbors like Germany, Italy and Spain, and the public finance deficit which is still above European rules, despite a significant increase of the tax burden on households. These are the challenges to which the new political majority is confronted.

As a paradox, the main points of the economic policy announced by the Prime minister is in keeping with his predecessors with a priority given again to the reduction of social charges paid by enterprises The rebalancing of the tax burden in favor of active people and to the detriment of pensioners will not result in a significant reduction of the total level of taxation. The choice in favor of a supply-side oriented economic policy is confirmed. But, until now, that choice has not delivered the expected results. The hesitations about the calendar of the fiscal reforms announced by Emmanuel Macron during his electoral campaign will have little impact on the activity in 2018. Just the spreading of the augmentation of the “CSG” for the pensioners would soften the foreseeable shock which is not without reminding us what happened in 2013. But the point is not, until now, on the agenda. The suppression of the property tax, on the opposite, creates a major technical issue to local authorities. They know how much they collect but they ignore its repartition among contributors according to their revenues. And that information is necessary for them to ask for its reimbursement by the State as it has been promised. At last, the modification of the basis of the wealth tax, as the ceiling put on financial revenue taxes will not change the economic behavior of those who will benefit from it, against what Prime minister expects. Due to their financial situation, these tax cuts will mainly increase the wealth and the savings of those who will benefit from them without contributing to growth.

The combined consequences of a more important than expected deficit in 2017 and of the fiscal announcements for 2018 will make much more difficult for France to comply, for these two years, to its European commitments, except if sharp cuts in public expenditures are decided. Until now, no government ever achieved that. It remains to the Prime minister a little more than two months, until the presentation of the 2018 finance bill, to precise his choices and to protect the economic credibility he was given by the political success of the new majority.

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