Tax cut: “The risk is to give on one side to take on the other”

LE SCAN ECO/INTERVIEW – Two economists of different leanings weigh in on whether to lower taxes next year. A contradictory announcement with France’s European commitments on its deficit.

François Hollande announced on Thursday that he. The Head of State expects stronger growth next year than in 2015, at least equal to 1.5%. Two economists of different leanings, , director general of the COE-Rexecode institute, a renowned institute close to employers, and , economist at the OFCE and co-author of a book on household and business taxation, give their opinion on the advisability of making such a tax gesture next year.

Le Figaro – Can France afford to lower taxes next year?

Denis Ferrand – If it wants to keep its European commitments, no. France has promised to reduce its deficit to 3.3% next year, and anticipates growth of 1.5% the same year to do so. If it does not want to contravene these commitments, the government can afford new tax cuts only if it achieves stronger growth than announced.

However, this hypothesis is highly improbable. Growth was flat in the second quarter and the factors that boosted it in the first quarter – falling interest rates, oil prices and the euro – are tending to wear off. Chinese growth is running out of steam. We therefore only expect growth of 1.4% in 2016.

The government’s room for maneuver will be all the more reduced as inflation eats into the State’s tax revenues and makes it even more difficult to reduce the deficit to 3.3% of GDP in 2016. On the first part of over the year, for example, VAT receipts were much lower than expected. Over the whole year, the shortfall for this tax alone could reach 3.6 billion euros.

Henri Sterdyniak – There are two possible answers. If we stick to European logic, France does not have the means to lower taxes again. Its deficit will be over 3% of GDP next year, so it has no budgetary room for manoeuvre. We can however consider the fact that the European Union is an area of ​​weak growth and that it would be desirable for it to put an end to the austerity policy that it has been pursuing for several years. France can choose to stick to the European commitments it has made, and settle for weak growth. Or choose to implement another economic policy, more favorable to growth, and let slip its deficit.

How will the new tax cuts be financed?

Denis Ferrand – If the government still wants to lower taxes, it will have only two options: increase the deficit to the detriment of its commitments, or reduce public spending. The deficit is already very high (4.4% in 2014), well beyond the commitments made by François Hollande during the presidential campaign.

It can therefore choose to further cut public spending, but again, the government is already having a hard time reaching the 14.5 billion euros in spending cuts it has committed to this year. Going further will be difficult. The risk would also be to give on one side to take on the other, for example lowering income tax for the less well-off but reducing social benefits. However, it is possible to reach different audiences.

Henri Sterdyniak – The government had already chosen to finance the responsibility and solidarity pact, intended for businesses, through sharp cuts in public spending. For example, he called into question the indexation of certain social benefits to inflation or even greatly reduced the resources of local authorities. Is it logical to maintain or even increase these austerity measures, while on the other hand lowering household taxes? The logic of François Hollande’s economic policy seems to me to lack clarity.

Is a tax cut the most sensible way to stimulate the French economy?

Denis Ferrand – In my opinion not. The French economy is suffering above all from the weakness of business investment. Household consumption is rather there. Lowering household taxes would obviously be positive, but the effect on household spending would only be temporary. The reduction in taxes would be consumed very quickly. The weak link in growth is rather the competitiveness of the French economy. If there is a building site to open, it is that of the taxation of the capital, very heavy in France, which handicaps the investment of the companies. The challenge is there.

Henri Sterdyniak – Business investment: this is where the problem lies. However, the government has reduced corporate taxes by 20 billion euros and announced 20 billion euros in additional relief. No result. There is therefore no point in going any further. What is needed, however, is a discourse and a European policy that encourages companies to have confidence in the future, and therefore to invest.

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