Hollande's Risky Plan

The French president is gambling on a tax-and-spend approach to meet deficit goals. 

“Only justice will guide our actions.” So went a favored slogan of French president François Hollande during his successful election campaign this past spring. Ever since, Hollande and his most equitable team of seventeen male and seventeen female ministers have repeated that France’s longstanding European and international financial commitments would indeed be met—but “justly,” in contrast to the hash left by the preceding government. Last week, Prime Minister Jean-Marc Ayrault delivered his “discours de politique générale” (something like a State of the Union or Throne Speech), providing the government its first opportunity to specify exactly what this justice agenda would be.

It turns out that Hollande intends to do, more or less, what he said he would over the course of the campaign: tax his way to equilibrium. With growth forecasts cut to just 0.3 percent for 2012 and 1.2 percent for 2013, France must find around ten billion euro this year and thirty-two billion next year to meet its deficit target of 3 percent of GDP for 2013. The government will try to meet the difference between the country’s alleged growth and the deficit target with 16.7 billion euros in new taxes. While the middle class and average French households will get hit as well, the new taxes are especially directed at the traditional punching bags of the Left: oil companies, the banks and indeed simple shareholders, the so-called “rich,” who, according to government calculations, will shoulder around 73 percent of the new tax burden.

To be sure, Prime Minister Ayrault also spoke vaguely about “cost-saving measures.” But the measures announced so far, such as reducing the operating budget in government ministries by 30 percent, are simply low-hanging fruit, whereas the tax increases are substantial and hard hitting: A 3 percent tax on dividends. A 550 million euro surcharge on oil and energy stocks. An already existing 0.1 percent tax on financial transactions has been hiked from 0.1 to 0.2 percent. An emergency “wealth tax” will be levied this year before the proposed introduction of the 75 percent wealth tax on all income over one million euros. Not all taxes are going up, however. The Sarkozy government’s planned increase in sales tax has also been shelved in an effort to preserve the so-called “purchasing power” of the French consumer. And book lovers, rejoice! The sales tax on books is heading down to 5.5 percent from 7 percent.

France does not harbor the same revulsion to tax increases as does the United States, to put it mildly. Prime Minister Ayrault did not hesitate to justify his proposed tax hikes in the language of solidarity and patriotism. “To be a patriot,” he said, “is doing one’s duty after having received so many rights, to give the Republic what she has given you.” He added, in a threatening or rather pleading tone, “Patriotism is not fleeing France for fiscal havens and leaving those who stay the weight of the effort.” In the 1980s, another socialist president, François Mitterand, gave an unexpected boost to the newest arrondissement of Paris, otherwise known as South Kensington, London. To judge from the whispers of prominent French businessmen and athletes over the past few weeks, London might yet benefit from another wave of French immigration.

Hollande’s Gamble

Will Hollande’s additional taxation of riches and capital, while sparing consumption, produce the much-vaunted “growth”? Doing business in France is already expensive and complicated, and the current measures are likely to make the situation worse on both fronts. At a moment when neighboring Italy is suffocating under the weight of its black-market economy, the French government apparently is unconcerned about the growth of the French version. At least for 2012, the tax increases may allow the French government to meet its obligations. But capital flight, increased business costs and uncertainty suggest growth under 1.8 percent next year, even before one factors in the wider European debt and banking crisis, which rolls on and on.

There is no magic formula to produce growth, and it may occur in France for wider European reasons, above and beyond Paris's tax-and-spend agenda. Maybe France will get lucky. But it’s clear that if the vaunted growth fails to materialize, François Hollande will have little leeway to deal with a very difficult—and ultimately perhaps explosive—domestic situation. Hollande is already confronted by a significant leftist rump and a resurgent Front National, the Far-Right party that, for the first time in decades, sent two deputies to the National Assembly. The youngest deputy in the assembly, in fact, is Marion Le Pen, the twenty-two year-old niece of party chief Marine Le Pen and granddaughter of party founder Jean-Marie, who represents a rather different vision of “youth” than that advanced by Hollande and the socialists during the campaign.

The power of both the extreme Left and Right was somewhat suppressed by the recent legislative elections, which gave Hollande’s socialists a commanding majority in the National Assembly. But without the hoped-for growth, things could get ugly very quickly. And the president promising “only justice” could find himself in a nice, shiny pair of golden handcuffs.

Neil Rogachevsky is a PhD candidate at the University of Cambridge and an ERASMUS visitor at the École Normale Supérieure, Paris.

Image: Jean-Marc Ayrault