RaboResearch - Economic Research

France’s 2019 budget to reduce size of government

Economic Update

  • Macron has struggled with record low approval ratings and decreasing economic confidence indicators
  • This detracts attention from Macron’s strong parliamentary mandate for reform, and both short and medium term upward potential for the economy
  • Consumer confidence may have suffered from the transitionary effects of changes in employees’ social security contributions
  • Implementation of previously announced measures and new tax cuts in the 2019 budget are expected to stimulate household and corporate spending
  • The 2019 budget proposal represents modest improvements in public finances

A September poll carried out by IFOP found that only 29% of respondents were satisfied with their President, Emmanuel Macron. This is hardly an encouraging sign for Macron. To make things worse, his minister of Interior Affairs Collomb just resigned, out of dissatisfaction with the President’s leadership style. He was preceded by environment minister Hulot, who resigned in summer over discontent with the government’s sustainability policy. A similar trend downward in economic sentiment indicators suggest that either politics influence economics, or the other way around (figure 1 and 2). However, these pictures detract attention from Macron’s strong parliamentary mandate for reform, and both short and medium term upward potential for the economy.

Figure 1: Strong decrease in consumer confidence
Figure 1: Strong decrease in consumer confidenceSource: Macrobond
Figure 2: Purchase managers less optimistic
Figure 2: Purchase managers less optimisticSource: Macrobond

Macron’s reform agenda is ambitious, and significant measures have already been taken or are under way, in particular in the areas of labour market reform – a market traditionally suffering from strong popular resistance to change – and the business environment.

The French government on Monday 24 September presented its budget proposal for 2019. It is based on a conservative GDP growth projection for 2019 of 1.7 percent. On the revenue side, proposed cuts in business taxes worth EUR 20bn (through a reduction in the standard rate for the corporate tax to 31%) could provide an impulse for business investment. Households will benefit from cuts in household taxes totalling EUR 6bn, resulting from cuts in required social security contributions (for unemployment and illness) as well as from further reductions in the housing tax. As these reductions more than offsets increases in fuel and tobacco taxes, they could provide a positive impulse for household consumption in the short term. Moreover, the transitory effects of changes in employees’ social security contributions should run off in 2018Q4, as unemployment contributions are removed, compensating for the increase in general social contributions that has already been implemented as of January. 

On the expenditure size, a one-off expenditure is registered due to the transformation of the so-called CICE (Crédit d’impôt pour la compétitivité et l’emploi) tax credit into a permanent reduction in employers’ social security contributions. This boils down to a 0.9 percent of GDP addition to the headline public deficit for 2019, lifting it to 2.8 percent from a projected 2.6% in 2018. Without this exceptional mark-up – the government emphasizes – the deficit would have decreased to 1.9 percent. Other expenditure increases relate to security and defence, including a 5% increase of the defence budget. Compensation comes from, inter alia, limiting public pension increases, containing social welfare expenditures and job cuts in ministries other than security, justice and defence.The temporary deviation from the planned deficit reduction may be acceptable to the European Commission. But a critical stance is to be expected as long as measures to reduce expenditures are not defined more precisely. Also, France will remain under scrutiny from the European Commission as regards to both the level and the pace of reduction of its public debt: According to the budget plans, public debt will stabilise at 98.6 percent of GDP in 2019, leaving the government’s ambitions for the much-needed reduction of public debt to the later years of its 5 year tenure.

Figure 3: Big government in France - but Macron aims to change this
Figure 3: Big government in France - but Macron aims to change thisSource: Macrobond

Still, by cutting household and business taxes and limiting government expenditure, the budget is consistent with Macron’s pledge to reduce the share of the State in the economy. This is a welcome change that should bring France more in line with other large European economies and bodes well for future economic dynamics. The economic benefits of this development will take time to materialise fully, however, so Macron may have to accept low approval ratings for longer – or respond to popular unease with his government in other ways. In that respect, he could draw some lessons from the departures of his now-ex-ministers Hulot and Collomb… (see figure 3).

Ester Barendregt
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 51828489

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