French Prime Minister Jean-Marc Ayrault took the public by surprise Nov. 19 when he announced a complete overhaul of France's fiscal system. Then on Nov. 25, he began consultations with the country's main trade unions and business associations to debate the reforms. Ayrault's goal is to present a finalized plan during the summer of 2014 that will become operational in 2015. So far, the prime minister has not said what the reforms would look like, but he promised they would make France's fiscal system "fairer, more effective and easier to understand." He also pledged to make France's taxes simpler, noting that the reforms would not raise taxes.
As a part of its overhaul of the tax system, the Elysee wants to address the taxation of households and firms, the financing of social protection and the cost of labor. Central to the new measures will be the debate over reforming income tax and the General Social Contribution, one of the taxes that funds social welfare. Other significant taxes, such as the corporate tax and the value-added tax, will probably be included in the debate. Since unions and companies have conflicting ideas on how the current structure of taxes and social contributions should be altered, the debate over the fiscal reform will be very contentious.
Internal Tensions and International Criticism
By including unions and employers in the negotiations over fiscal reforms, Ayrault is trying to quiet social unrest. Since coming to power in 2012, Hollande's government sought to involve unions and companies in its policies, with the intent of reaching consensus and avoiding significant protests. This strategy proved effective in the first year of his term, when he did not face meaningful resistance to his policies. But this strategy prevented Paris from applying structural reforms to restart the French economy. France's timid pension reform clearly illustrates this dilemma. Moreover, Hollande relied mostly on tax hikes rather than spending cuts to reduce the French deficit.
Now after 18 months in office, Hollande's government has upset most segments of the French population. In early November, workers and businessmen in Brittany protested the ecotax, a tax on the transport of heavy goods. These protests brought the Red Caps, a diverse group of farmers, union leaders and businessmen in the food industry, to the center of social unrest in France. On Nov. 21, agricultural unions blocked highways leading to Paris to protest rising taxes for fertilizer, increased environmental regulation and a redistribution in the use of the European Union's Common Agricultural Policy.
Farmers are not the only people upset with Hollande. A recent opinion poll revealed that two out of three French citizens are ready to take to the streets to protest the government. The poll emphasized that various elements of French society, regardless of political ideology or economic standing, have coalesced in opposition of the government's actions. While the anti-government camp is diverse, popular anger largely seems to have a singular target: higher taxes. Independent workers consider the fiscal pressure on them excessive, while employers often criticize France's social contributions, which affect the country's labor costs.
On Nov. 14, Le Figaro newspaper leaked a confidential report on the economic and social climate that the heads of France's 101 prefectures sent to the interior minister Oct. 25. According to the report, the prefects see "a society rife with tension, frustration and anger." The report also cautioned that more popular unrest is occurring outside the framework of trade unions, with the emergence of the Red Caps as a clear example of this trend. This is also occurring elsewhere in Europe, best exemplified by the rise of grassroots activism in Spain. On Nov. 12, the leader of the General Confederation of Labor trade union, Thierry Lepaon, warned about "an explosive social climate" in France.
The fiscal pressure on households and companies has also been criticized at the international level. On Nov. 12, EU Commission President Jose Manuel Barroso said that France's fiscal policy has "reached the limits of acceptability," with high company taxes hampering economic growth. Then on Nov. 13, the Organization for Economic Co-operation and Development released a report saying that France is lagging behind other European countries in reforming its economy and needs to take comprehensive steps to restore its competitiveness.
A Very Delicate Reform
While the debate over France's fiscal system will have a political component, it will also be shaped by the status of the French economy. France has been dealing with low economic growth over the past two years, and the French gross domestic product is likely to expand only modestly in 2014 (below 1 percent, according to most forecasts). This will affect Paris' coffers because slow economic activity means meager revenues. On Nov. 17, Budget Minister Bernard Cazeneuve admitted that weak economic growth was causing a 5.5 billion-euro ($7.48 billion) shortfall in 2013 tax receipts, mostly because of lower-than-expected revenues from corporate taxes.
Paris is also struggling to reduce its deficit. In late October, the Elysee announced an extra 3 billion euros in taxes for 2014. This will take France's fiscal burden to 46.5 percent of GDP, one of the highest in the eurozone, and make 2014 the fifth consecutive year that the tax burden in France has grown. The European Union is pressuring France to lower its deficit to 3 percent of GDP by 2015 from 4.8 percent in 2012. This will prove politically difficult, since general government expenditure in France accounts for roughly 57 percent of GDP (by comparison, in Germany that figure is approximately 45 percent).
High taxes are nothing new to the French, who generally see them as the price to pay for good public services such as health and education and a strong public safety net in the form of unemployment benefits and family allowances. So far, Hollande's strategy has been to largely preserve these benefits, but as a result additional fiscal pressure was put on households and companies. The big question for France is whether this social contract will remain in place in the context of growing fiscal pressure, stagnating economic activity, rising unemployment and decaying confidence in the government.
