We have a new experiment.
Monsieur FranÃ§ois Hollande est Le PrÃ©sident de la RÃ©publique.
The new President has marketed himself to the Electorate as a Socialist, and his promises to obtain votes include – amongst other things (excerpts from the FT):
not to ratify the EUâs new fiscal discipline treaty unless new growth-promoting measures are added
higher taxes on business and top earners
subsidies for companies taking on younger and older workers
partial reversal of the rise in the retirement age to 62
a balanced budget by 2017
To me that looks like a very square circle indeed, but – not being a Socialist PrÃ©sident of France Â – what do I know?
The 2011 French Government Budget Deficit was 5.2%Â of GDP, or about 90bn Euro. That was better than the expected 5.7% after 10s of billions of Euro saved through one-off savings of costs and takings of benefits.
The Court of Auditors (France’s independent organisation to report on Government finances) say that even without the rolling back proposed by Monsieur Hollande, Monsieur Sarkozy had put only a fraction of the required measures in place:
France’s Court of Auditors – a quasi-judicial body charged with reviewing public finances – said in a report that the government last year had taken only one tenth of the measures required to keep its promise of balancing the public finances by 2016 and that much tougher steps would be needed.
“At this rate it would take 10 years to get to budgetary equilibrium,” said Didier Migaud, first president of the Court of Auditors. “The biggest steps will remain to be taken in 2013 and 2014.”
The Court of Auditors estimated that France had reduced its structural deficit – excluding cyclical economic effects – to 4.5 per cent of GDP in 2011, down by just 0.5 of a percentage point from the previous year.
And reality will urge the question as to who is going to pay for it all, and how, and where the money will come from.
The question for Monsieur Hollande is quite simple:Â does he know?
PrÃ©sident Holland is not in a position to borrow, nor to print, much money because of the Â need to preserve the Country’s international credit rating, and because he does not control the French currency.
A 75% top rate of tax for everyone earning more than a million Euros a year is innovative,
The Socialist favourite in France’s presidential election, Francois Hollande, has said top earners should pay 75% of their income in tax.
“Above 1m euros [Â£847,000; $1.3m], the tax rate should be 75% because it’s not possible to have that level of income,” he said.
and it’s a good Aunt Sally.
The problem for this proposal is that the number of people in France at that income level is only a few thousand. When Mr Sarkozy introduced an income tax supplement for those earning over 250,000 Euros it only caught 25,000 people:
Those with an annual income (including income from capital) of between â¬250,000 and â¬500,000 will pay an tax of 3% on income between this range, while those with an income above â¬500,000 will pay at the rate of 4% on any income above the threshold.
The tax is imposed on net income, after determination of the tax liability under the standard scale rates. As a result, its impact will be limited, estimated to affect only around 25,000 taxpayers and costing â¬400m.
This tax is stated by the government to be ‘temporary’, until there is a balanced budget, so it is likely to be around for quite a while!
Even if – on the back of an envelope – Monsieur Hollande takes an extra 0.5 million Euros from 5,000 people every year, which assumes a high mean average income of 2.5 million Euro for those people, it is only around 2% of the deficit.
It will take away investment money, and London has a very good French school – the Â LycÃ©e FranÃ§ais Charles de Gaulle – in Kensington, with 3000 pupils.
London also has a top income tax rate of 45% (ignoring National Insurance), almost the same as they are currently being charged by Sarkozy, which is the 41% top tax rate plus the 4% supplement I mentioned above.
And then there are Switzerland and Luxemburg just over the border.
Hollande could also try to put into practice his political rhetoric about tax concessions to big business:
âThe government was caught off guard by the slowdown in growth,â Mr. Hollande said in an interview published in the left-leaning dailyÂ LibÃ©ration, before details of the new austerity plan were formally announced. âLetâs not forget that since the beginning of Nicolas Sarkozyâs term, 75 billion euros in tax revenues were lost due to tax breaks given to large firms and wealthy households. It would have been legitimate to recoup some of these first, given that they have yielded no tangible benefit to the real economy.â
75 billion Euros sounds like a lot of cash.
Unfortunately over a
7Â 5 year French-Presidential term, that is likely to be well under 20Â Â 25% of the deficit, before the cost of the proposed extra expenditure such as partially lowering the retirement age again.
And if Mr H wants to balance the budget, he will need at least
700Â 500 billion Euros, not 75, on top of stopping the underlying trend which is going resolutely in the wrong direction.
Those are the same problems which our own left-wing Â economists on the left run into when they meet reality, and ignored by our noisy teenage wibblers with megaphones, inside their bubble.
So colour me sceptical, and I’ll be interested to see if it works.
But boy I’m pleased that the French Experiment is happening in France.