French Budget: Juste pour rire!

Written by Hilary Barnes

As Byron might have said:

“I say the budget is a serious matter,
And so, for God’s sake, hock and soda water!”

But the French budget also creates its moments of mirth. For example, it introduces a new tax of 1% on corporate earnings before interest, depreciation and tax (EBITA), applicable on EBITA for 2013 and hereafter.

The new corporate tax applies to companies with a turnover of €50m and over. The revenue is expected to be €2.5bn (just over 1% of GDP). Therefore, in the eyes of whoever wrote the script,

“in effect this lightens the burden of taxation on PME’s (medium-sized companies).”

You know, like “My wife has put on 10 kilos, that makes me that much lighter“.

The budget statement goes on (my translation):

“The aim of this tax is to favour growth and employment by focusing less on production than the result.”

Can anyone explain the meaning or logic in this? How on earth this tax will favour employment (or, for example, investment, which is a key element if we are talking about growth), beats me.

One effect will be to reduce pre-tax profit, which is the subject of a tax credit, under a programme known as CICE (Credit Impot Competitivité Emploi), so in turn the new tax will reduce the tax credit. The credit is related to wages up to a certain level, a measure is supposed to create 300,000 jobs between now and 2017 and to lighten taxation of businesses by some €20bn.

The initial statement by the finance minister, Pierre Moscovici and the tax minister, Bernard Cazeneuve, is also good for a laugh. They seem to believe in the benefits of “contractionary expansion“, though whether they are aware of what they are saying is another matter.

Having pushed taxation to almost 47% of GDP, rivalled only by Denmark among OECD member states, with a 2013 budget that slashed about 1.9% from domestic demand, and with a new negative “fiscal effect” of about 0.9% in 2014, the ministers declared:

“Today these efforts are producing results. Growth has returned.”

Should we conclude that with a just a little bit more budget contraction there will be even more growth? God forbid.

They add in the same breath:

“We have regained our budgetary sovereignty, which is to say the liberty of choice to prepare the future.”

That should be obvious to everyone. We all know that the general government debt to GDP ratio is expected to increase to just over 95% in 2014 from 90.2% in 2012 and 93.4% this year. After that, we are assured, it will fall, and after that we may be able safely to conclude that budgetary sovereignty has been regained.

And what about this?

“We have made demands on the French, it is true, but these efforts were consented to by replacing justice at the heart of our fiscal policy.”

Funny thing, though: no government of the Fifth Republic has ever been as unpopular as this one, largely because no one has escaped the lash of rising taxes, including 1.2m additional households who will be paying income tax for the first time this year (the floor at which income tax kicks in has been lowered).

When we come to the serious business of the budget deficit there is a nice twist to the tail (tale?). The intention is to reduce the general government budget deficit to 3.6% of GDP in 2014 (It should have been reduced to 3.7% in 2013, but is expected to be about 4.1%) and then to 3.0% in 2015, when a helpful GDP growth rate (volume) of 2% is projected.

But in the budget table that shows the key revenue and expenditure totals, there are two outcomes, one “hors PIA“, which is the one that counts with Brussels, the Maastricht deficit, and the other, including PIA.

PIA stands for Programme d’investissement d’avenir (Future investment programme), which is for €12bn, and was announced by the prime minister in August. This little item, “designed to reinforce our competitiveness, employment and the sustainable development of the economy,” does not affect the deficit according to the Maastrict critieria, so one can choose between a budget deficit for 2014 of either €70.2bn or €82.2bn (GDP about €2,060bn this year and €2,100bn in 2014)

The €12bn will count as one of those “contingent liabilities” (guarantees, civil service pension liabilities, among them) or off-balance sheet liabilities, that are valued at over €3,000bn, compared with the Maastrict deficit around €1,800bn.

Which of the two deficits is of more importance when placing bets on France’s future solvency is a good question. Perhaps we’ll find out at some Comedy Club.