In a surprising turn of events, France’s 2023 budget deficit was found to be 5.5 percent of GDP, 0.6 percent over the government’s target. This €154 billion gap casts doubt on President Macron’s goal of reducing France’s deficit to less than 3 percent of GDP by 2027, in line with the EU’s Stability & Growth Pact rules.
The French society is currently engaged in a debate about economic growth, the quality of public spending, and overall fiscal fairness. The public protests, such as the Yellow Vests, have made it clear that tax policy’s effects on their standard of living is a critical issue. Partners interested in joint economic reforms at the EU level are also watching with a skeptical eye.
France’s problem is not the lack of profitable economic activity to tax; it’s the tax system’s inefficiency. To make systematic and competitive reforms, policymakers should focus on principled tax policy. Finance Minister Bruno Le Maire has called for cuts to public spending to reduce the budget gap and has ruled out increasing taxes. However, opponents argue that tax increases must be part of the long-term solution.
French tax reform is more complicated than whether the rich should pay more or the poor should pay their own way. Proposing policies that sound good politically but don’t solve the problem fail to raise sufficient revenue and further erode public trust in policymakers to find meaningful solutions.
Reducing public spending is one way to close the budget deficit in the short term. However, given that the total rate of tax and social contributions in France is close to 50 percent of economic production, policymakers should avoid cutting public spending too rapidly because it can reduce long-term economic growth.
Understanding the distortive effects of certain tax policies compared to others would allow policymakers to achieve their growth and revenue goals more easily. For example, taxes on the most mobile factors in the economy, such as capital, cause the most distortions and have the most negative impact. Taxes on factors that can’t easily be moved, such as land, are the most stable and least distortive.
After years of being the least competitive tax system in the Organisation for Economic Co-operation and Development (OECD), France has made its tax system more competitive under President Macron by gradually reducing the statutory corporate income tax rate from 33.3 percent to 25.83 percent, cutting personal income taxes, simplifying contributions to the social security system, and implementing various property tax reforms.
However, according to Tax Foundation’s 2023 International Tax Competitiveness Index, France still ranks 36th out of 38 OECD countries. This is due to significant complexity throughout the tax system, tax base issues, and economically distortive policies.
The good news for French policymakers looking to efficiently raise more revenue while maintaining economic growth is that there are lucrative options available. At €73 billion, France has the largest VAT actionable policy gap in the EU. Smoothing marginal tax rate variation over income levels would likely raise labor supply and encourage the upward mobility of workers. Finally, eliminating regressive production taxes on businesses would increase their competitiveness and growth potential.
Rather than pushing unsound tax policy solutions because they are politically convenient, French policymakers should adopt structural tax system reform. Focusing on competitiveness, neutrality, and efficient policies to raise revenue would go a long way in increasing economic growth and stabilizing public finances over the long term.