Wednesday, 13 November 2013

FRANCE: Francois Hollande's Taxes ''U-Turns''

FRANCOIS Hollande has hit an all-time low in public popularity for a French president. The latest poll on November 2, 2013, gave him 26 per cent support - up from 23 per cent in October, but a level of unpopularity which has never been seen before.

There are good reasons for this. The socialist majority has never appeared so weak even though it holds power at almost every level in the country - nationally, regionally, in local government and most big cities. And it is now facing a barrage of tax revolts which could damage its ability to govern as it makes plans for new taxes and then backtracks on the plans as they prove unpopular.

And now ratings agency Standard and Poor has cut France's credit rating from AA+ to AA. It said it had downgraded France on November 8 because the government's inability to control public spending and France's high unemployment was making it hard for the government to make important reforms which would boost growth. The move comes almost two years after France lost its top-rated AAA status.

Unemployment reached a record high of 3.3 million in September and is still rising, although more slowly. The number of defaulting companies topped 12,790 for the third quarter, the second worst figure since 1993.

President Hollande’s government - in power for 16 months - chose to increase taxes rather than drastically cut spending to reduce its deficit. The government has introduced more than 80 tax rises since it was elected in May 2012. Now football clubs are planning to strike in November against the 75 per cent tax on incomes above one million euros.

The government also targeted personal housing savings account (PEL), saving accounts based on stocks (PEA), employee saving schemes and life-insurance schemes by voting through measures for retroactive taxation. This would have clawed back tax on capital gains made over the last 17 years.
France is renowned for its lack of tax stability and a high level of legal uncertainty, but this change indicated that the rule of law could be broken at any time.

But the government did an about turn and decided in October to impose the new taxes only on life insurance. Violent demonstrations erupted in Brittany on November 3 over government plans for an eco-tax on freight traffic.

Once again there were confusing signals as the government reacted with French Prime Minister Jean-Marc Ayrault calling for the eco-tax to be suspended. But this merry dance by the government - one step forward and two steps back - is not new. The inconsistencies include a government announcement of a new tax on companies’ earnings before interest, taxes, depreciation and amortisation (EBIDTA). Critics said how bad this would be for investment when the government was supposed to create growth.

The government stopped that tax but announced an increase in the corporate tax rate a day later.
The impression is that the government is unaware of how a company and the economy work. Ministers seem incapable of anticipating the consequences and reaction of their proposals leading to an abrupt reversal of policy causing further confusion.

Strong leadership is needed to reform France and to reduce public spending currently at 57 per cent of GDP. This is financed by a soaring debt at 93 per cent of GDP and tax pressure at 46 per cent of GDP. But reform is almost impossible given the French model of corporatism in the context of state control of economic and social matters and centralism, where each social corporation refuses to ‘pay’ for reforms.

France’s five and a half million civil servants have no interest in reducing public spending. There is also a large dependence on the welfare state which means another class of people do not want to reduce welfare benefits. A third of GDP is spent on welfare. But another class of people - private sector workers, entrepreneurs and the wealthy - has an interest in drastic reform which sees public spending reduced, taxes cut and regulations simplified.

Entrepreneurial movements have emerged to defend business with lower taxes and social contributions. This could be the perfect opportunity for a new French revolution, given the public nausea against tax increases.

It is unsurprising that the French credit rating has been cut again given France's sluggish growth, rising unemployment, rising debt and now the increased legal uncertainty. France is ‘too big to fail’ for the moment and benefits, like other eurozone countries, from potential support from European Central Bank President Mario Draghi. But its ‘luck’ cannot last forever.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Photo-Credit: AFP-French President Francois Hollande, speaking at ''Les Élysées'', French Presidential Palace-Photo