In the seven years that he has been France’s president, Emmanuel Macron has bet on tax cuts for the wealthy and for corporations as a recipe for stimulating the economy. His new government is about to tear up that playbook.
Faced with a rapid deterioration in the nation’s finances, Mr. Macron’s recently appointed prime minister, Michel Barnier, is opening the door to higher taxes on businesses and the rich, in a last-ditch bid to plug France’s widening budget deficit and reassure worried international investors about the government’s ability to tackle the problem.
Mr. Macron is under pressure to act quickly. Borrowing costs for France, which has Europe’s second-largest economy after Germany’s, soared Tuesday to their highest level since the 2008 financial crisis, as investors increased the premium they demand to hold French debt. The government is facing an uphill battle to control a ballooning debt and deficit that have become among the highest in Europe.
Warning that France’s financial situation had worsened rapidly, Mr. Barnier said on Sunday that he would open the long-taboo subject of reversing several of Mr. Macron’s signature tax cuts, despite pledges from the president just a few weeks ago not to lift taxes.
“I’m not going to raise taxes on all French people,” Mr. Barnier said in an interview on French television. “But I cannot exclude the wealthiest and corporations from the national effort to rectify the situation.”
How did France reach this critical point?
Macron’s reputation as ‘president of the rich.’
Since he was first elected in 2017, Mr. Macron has made it a hallmark of his presidency to burnish France’s reputation as a place to do business. He cut taxes on companies and curbed a national wealth tax, earning praise from investors — and the nickname “president of the rich” from his detractors.
Mr. Macron’s tax policies included lowering the official corporate tax rate to 25 percent from 33 percent, and reducing taxes for manufacturers and industry from what were once among the highest levels in Europe. He turned a generous one-time employment tax break for companies into a permanent tax cut. And he introduced a flat tax of 30 percent on investment income.
Mr. Macron stirred up controversy when he watered down a wealth tax on the very rich by replacing it with a tax on real estate assets valued at more than 1.3 million euros.
The tax policies’ aim was to stimulate growth by getting wealthy individuals to invest more in the economy and encouraging businesses to hire. But critics say they have mostly widened economic inequality, while draining tax revenue from the national coffers. A study by the Institute Montaigne, an independent French think tank, found that the combined measures cost the French Treasury nearly €15 billion in lost income.
The prime minister shifts to tax increases.
Mr. Barnier needs to find an eye-popping €110 billion in savings over the next several years to bring France’s ballooning debt and deficit back in line with European Union rules. Much of that will be in the form of slashing government spending.
Mr. Macron has vociferously opposed tax increases, calling the impulse to do so “a very French disease,” but Mr. Barnier has signaled he has no choice. So far, the prime minister has not divulged specific tax increases. But in interviews in recent days, he and his new cabinet have said that they are ready to cross several of Mr. Macron’s red lines.
Among the avenues being explored are increasing the flat tax to as much as 35 percent, a shift that French economists say could bring in up to €300 million in new revenue.
Also under consideration is a temporary tax on “superprofits” earned by corporations, a plan that Mr. Macron had floated but then abandoned several years ago, when profits at oil and food companies surged in the wake of the pandemic. And some within Mr. Barnier’s camp have floated the idea of raising the corporate tax closer to where it was before Mr. Macron cut it.
As for restoring the wealth tax, Mr. Barnier has declined to say if that is in the cards. But if his government were to do so and reduce other tax loopholes, it would bring in €10 billion to €15 billion annually, according to Terra Nova, a French think tank.
French businesses support higher taxes, with conditions.
Patrick Martin, the president of Medef, France’s leading employers’ organization, said he was “ready to discuss” a tax increase for businesses, on the condition that the government also sharply reduced spending and not enact policies that would penalize investment and employment.
And Rodolphe Saade, the chief executive of the CMA CGM shipping empire, said his company was ready to contribute a one-off payment to help mend France’s tattered finances, in a sign that big companies might be resigned to help plug the budget hole — as long as there were not more significant changes to the tax code.
“If there is a solidarity contribution by companies that generate profit, CMA CGM would pay its part,” he said in a briefing with reporters on Monday.
Foreign investors have remained silent for now. But the new government is especially keen not to scare them off. Mr. Barnier’s new budget minister is Laurent Saint-Martin, an executive who previously headed Business France, a quasi-government agency charged with luring investment. Mr. Barnier also tapped Antoine Armand, a liberal politician close to Mr. Macron’s thinking, as the new economy minister.
What happens next?
Public finances are deteriorating more quickly than thought: The French finance ministry is now expecting the deficit to reach 6 percent of economic output in 2024, up from a recent forecast of 5.6 percent, if the government does not take quick action. France’s debt load has ballooned to €3 trillion, or more than 110 percent of gross domestic product, the highest in Europe after those of Greece and Italy.
Mr. Barnier is meeting with political and business leaders this week to put together a budget blueprint to submit to E.U. officials after missing a deadline last week. He now faces a Tuesday deadline to show how France will get its finances in order.
