Written by Hilary Barnes
France’s economic indicators all point to serious problems in the business sector, which makes it extraordinarily inept of the socialist government that came into office in May to commence its commence its rule with a business bashing spree.
The profitability of non-financial corporations is at the lowest level for 30 years, and much lower than in Germany. Manufacturing industry has lost market shares at home and in export markets steadily over the past dozen years and manufacturing’s share of total output has fallen to less than 12%.
Graph courtesy of Natixis, Paris.
Unemployment is about 10.2% and rising. Real GDP has not changed for the past four quarters and is not expected to recover in the final quarter of this year either, according to a recent business sentiment indicator from the Banque de France.
The government sector is in no better shape. Public sector expenditure as a share of GDP is about 56%, higher than Sweden’s (but not quite as high as Denmark’s) and taxes as a share of GDP about 44%.
The central government budget has not been in surplus for 36 years. The general government debt is now just over 90% of GDP, while the budget deficit is about 4.5%.
This is a situation in which it should be fairly obvious to everyone that a vigorous business sector is not only desirable but essential of the country is to lift itself out of its present predicament.
In fact President Francoise Hollande and his top ministers all say that this is what they want, but business does not see it reflected by their acts.
Between a summer supplementary budget in July that increased taxes by almost €7 billion and a 2013 budget Bill that will add €20 billion to the tax bill, most of on the rich and big companies, but a sizable whack on households as well.
By comparison a €10bn curb on public spending does not count for much. After all, a large majority of public sectors support the left-wing political parties and President Hollande is beholden to them. Taken together with the clients of the French welfare state they form a majority of the voters.
Even the IMF in its latest world outlook report is concerned that France, in an effort to bring the budget deficit down to 3.0% in 2013, is tightening the budget screw too fast and too hard, noting that the budget tightening 2011 – 2013 will amount in all to about €64 billion (the current year’s GDP will be about €2,000 billion).
The business community is fighting back, but it is not so much against the sum of the tax increases as what are regarded as punitive taxes proposed on capital gains that have sparked a revolt.
The revolt was started by a handful of specialists in internet start-ups and snowballed into a movement which has acquired the name of The Pigeons – those who do not want to be plucked.
But it has now gone further, with almost all the country’s national employer organisations signing a joint statement on October 9 demanding that the government drops completely its capital gains tax proposals.
They are “ a grave danger to the entrepreneuriat,” declared Ms Laurence Parisot, CEO of MEDEF, the largest of the employer organisations. “Deeply harmful to business investment,” said the joint statement.
The government is proposing to bring the tax on capital into line with tax on incomes, in effect almost doubling the current tax on capital gains from about 33% (19% capital gains tax and 15% “ charges sociales” payable by the person concerned) to about 60% (45% + 15%).
Given the effort that is required to set up a successful venture, and the relatively small chance of success, business regards the proposal seriously discouraging and likely to destroy new business investment and jobs that they create.
The government has in fact already conceded that it will have to amend its proposals, but has come up with a scheme that is very complicated and places each entrepreneur in a different tax bracket according to how long he or she owned the company and by what he or she intends to
do with the money (less tax or perhaps no tax if reinvested in a new venture, but full tax if it is to be used for retirement).
This the employers regard as totally unacceptable, unfair, unrealistic and, to quote Ms Parisot, Kafka-esque as well.
As someone remarked, France has a government of the gauche (left) which has turned out to be about as gauche as it could get.
The following graph from Natixis, Paris shows the extreme disadvantage that France faces compared to the U.S. and the Eurozone as a whole:
Hilary Barnes is a veteran economics and business writer. He was for 25 years the Copenhagen Correspondent of the Financial Times, Nordic Correspondent of The Economist for part of that time, and published a paper newsletter, sold to international companies in the Nordic countries, called The Scandinavian Economies for over 30 years.