The inevitable is at last beginning to dawn on Emmanuel Macron. The extravagant spending spree initiated after the violent and year-long 2018 ‘gilets jaunes’ protests will have to be reversed.
With the coffers empty, France is not only at the mercy of international finance, she is now highly vulnerable to the next social or political crisis
Overgenerous Covid and energy subsidies are expected to push the budget deficit to 4.9 per cent of GDP with the French debt to GDP ratio at 114 per cent, the largest absolute debt pile in the EU and one of the largest in the world. Unlike Italy’s debt, most of France’s is foreign-owned, so that she is far more vulnerable to the ‘kindness of strangers’. France already has some of the highest taxation rates in the OECD. We now learn that Macron’s hugely unpopular legislation extending the pension age to 64 will still leave an annual €6 billion pensions’ deficit by 2030. Despite France’s new retirement age still being a good deal lower than other developed economies, like Germany or Britain, further extension is out of the question given the year-long strikes and protests the previous rise caused. France is now the subject of a pincer movement pushing her in the direction of raising taxes. Despite Macron’s repeated pledge not to do so, we all know that he is not averse to a good U-turn, from the decommissioning and now building of nuclear power stations to banning then permitting pesticides.
The first pincer comes from ECB interest rate rises that have mechanically raised French debt servicing to the second highest budget expenditure line after education, with more to come. The second is from France’s recently downgraded international credit rating led by Fitch and Scope Ratings, while Standard and Poor’s maintains a ‘negative’ outlook for France. Credit agencies are most concerned about France’s constantly rising debt trajectory since 2007 and its inability to stop, let alone reverse it. The agencies point to Macron being hamstrung in his planned reform of France’s extremely generous work and social benefits by the absence of a parliamentary working majority for the next four years.
Third, with less and less to spend, his finance minister this week announced that savings of €10 billion (£8.6 billion) need to be found. Finally, in 2024 Brussels will require member states to return progressively to the Commission’s pre-Covid debt and budget straitjacket. Emmanuel Macron is being forced in the direction of tax rises. They will be camouflaged as ‘green measures’ or ‘for the very rich’ or will target particular categories of business, such as motorway toll companies, ‘windfall taxes’ on excessive profits, or financial transactions. At the Paris summit this week on international financial assistance to developing nations, he sought international cover to raise taxes.
But Macron knows the impact this will have on France’s international ability to attract inward investment. Only last week, Henley & Partners produced a league table of countries to which High Net Worth Individuals (HNWIs), with investable assets of more than $1 million (£800,000), are migrating or exiting. France lost 12,000 millionaires in 2016 under the socialist presidency of François Hollande. Emmanuel Macron pledged to stem that flow and was dubbed ‘the president of the rich’. But a deep-seated egalitarian philosophy, notably over taxation, explains why not even Macron could adopt the kind of investment migration programme on offer in countries like the USA, UK, or Australia to attract HNWIs. In 2018 France lost 3,000 millionaires and in 2019 1,800 – equivalent to 1 per cent per annum of its total stock of millionaires. The country’s unfriendly tax regime is cited as the cause.
Raising taxes would deal a further blow to Macron’s stated desire to make Paris the European financial capital post-Brexit by sucking in HNWIs from London. Relatively few London bankers have crossed to the EU, let alone Paris. In 2022, London was ranked fourth city in the world in terms of millionaires (285,000), way ahead of Paris at 18th (93,000). After Brexit, a French parliamentary commission pointed to all the reasons why an exodus from the City of London to Paris was unlikely to take place. Other than the legal system, the complexity, cost and delay in hiring and firing employees, a major obstacle cited by heads of French banking institutions was not only high corporation and individual taxes, but also their unpredictability, with successive administrations raising them or making them more complex.
The economist Agnès Verdier Molinié recently warned that ‘France is on the verge of bankruptcy’. President Macron is clearly the subject of a complex pincer movement pushing him towards raising taxes. With the coffers empty, France is not only at the mercy of international finance, she is now highly vulnerable to the next social or political crisis that requires shaking the money tree. As Britain recently experienced under the brief Truss government, markets can turn at the drop of a hat and force tax rises on those administrations most committed to lowering them.
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