By: Diego Lopez, CASE Analyst
This past May 7th marked the first anniversary of Emmanuel Macron’s arrival in the Élysée Palace, heralding a change in the country. Young, pro-European and distanced from the old French parties, he prevailed in the second electoral round with a message “neither right nor left” over the right-wing candidate Marie Le Pen, winning a decisive 66% of the votes. But his victory was not only based on France’s newfound Europeanism in the light of the rise of the far‑right movements in Europe. The youngest President in France’s history arrived in the office with the goal of cutting down regulation and curtailing the role of the state in the economy. His electoral platform featured a number of ambitious (if occasionally controversial) reforms, such as the introduction of a 35 hours workday, tax cuts for corporations and great fortunes, and reduction of unemployment to 7%.
During his first year in the office, Macron pushed through three important fiscal reforms. In January, he began the process of gradual reduction of the corporate income tax from 33.3% down to 25%. In 2018, corporate profits will be taxed at 28% for the initial EUR 500,000 and at 33% for the excess, while in 2019 — at 31% for the excess. In 2020, a flat rate of 28% will be introduced, which will be replaced with 26.5% in 2021 and with 25% in 2022. Moreover, Macron replaced the progressive tax rates (running up to 45%) for capital income with a flat rate of 30%. Finally, he replaced the wealth tax (ISF) with the real estate tax (IFI), resulting in an effective 70% reduction of this contribution. While some of these reforms have been criticized on the grounds of favoring the rich and perpetuating economic inequalities, they have in fact removed excessive burdens to investment and saving.
In other areas of the French economy, opportunities for reforms are also aplenty. At 56.4% of GDP, France had the highest public spending among all OECD countries in 2016. Macron’s goal is to reduce this figure by 3 percentage points during his term, and he plans to do so by lowering social spending, laying off public servants, and finding savings in local governments. The budget deficit already decreased from 3.4% of GDP in 2016 to 2.6% in 2017 and is expected to dwindle further to 2.3% in 2018, although the drop must be viewed in the light of the favorable economic cycle in Europe. The unemployment rate dropped from 10.1% in 2016 to 8.9% in the final three months of 2017, but structural unemployment — particularly among less qualified workers — remains a problem. In 2017, between 200,000 and 330,000 job offers went unfilled for this reason.
The good economic climate in France is a fact, but it remains to be seen whether it is sustainable. Macron himself has underlined that his measures will take full effect only after a year or two and that he and his team were “not cheering about the current upturn” because they were “perfectly aware that to a large extent it’s down to the economic context.”