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France’s socialist budget experiment — revolution or ruin?

The French budget answers some questions and raises quite a few more, writes Alan Austin from France. Taxing the rich more is a big political achievement.

Mon Dieu! He has done it. The new Socialist President of France has fulfilled his pre-election promise to tax the rich at 75%.

Few believed he would. This was widely regarded as an ambit promise — or an “aspirational goal” in Australia — which he would not dare actually implement.

The keenly awaited first budget of President Francois Hollande arrived at the weekend. It answers several questions that have arisen during the national election campaign and since the June poll. It raises several more.

Hollande’s central challenge is to reduce the deficit by €30 billion next year. This is a eurozone obligation he has decided to honour despite condemnation from the Left. The budget shows he hopes to achieve this with €10 billion in spending cuts, another €10 billion in business taxes and the remaining €10 billion in taxes on incomes, mostly at the high end.

The top marginal tax rate will rise from 41% to 45%, still low by European standards. Special rates will apply to annual incomes above €1 million ($A1.24 million) for the next two years. Hence some individual taxpayers will indeed pay 75%, the highest rate in the world.

Of interest to observers in Australia and other developed nations is the impact Hollande’s economic management will have on eurozone stability and growth. Europe maintains significant trade relations with Australia, despite a relative shift in importance following the Asian boom. (Especially at Christmas where French bubbly is swapped for Aussie lamb.)

More importantly, eurozone countries have total investments in Australia about $A700 billion, about a third of total foreign investment. So fortunes are intertwined.

The other level at which France’s progress is significant to Australia and the world is as a showcase of socialist versus capitalist economic and social management. Side by side, France and Britain offer economists intriguing case studies. Both are developed post-industrial countries with similar populations — 66 and 63 million respectively — and similar challenges. Both were badly impacted by the GFC in 2008 and slipped into recession. France experienced four negative growth quarters, Britain five.

Both now have unemployment too high at more than 8%, both have public debt above 86% of GDP. And both are struggling to manage the impact of the eurozone crisis.

The rest of the world look with astonishment at Australia’s emergence from the GFC — with unemployment steady at about 5%, debt to GDP at a mere 26.8%, near-perfect interest rates and taxation at a low 31.8% of GDP.

With economy-related social upheavals increasingly frequent, France and Britain changed government at their last elections. In 2010 British voters threw out their Labour government after 13 years in favour of a Conservative-Lib Dem coalition led by David Cameron. French citoyens have just ended 17 years of right-wing rule with the election of Hollande.

So it will be intriguing to see how France’s Socialist program shifts the economic indicators over the next few years, if it does so at all. And, similarly, how the Conservative agenda impacts economic well-being in Britain.

One significant difference between the two is the overall rate of taxation, including direct and indirect. In Britain, taxes comprised 40.8% of GDP in 2011. In France the proportion was higher at 49.9%. Early indications are that those rates will equalise, but more likely because of hikes in Britain than falls in France.

The Cameron government’s first budget reversed the expansionary economic policies of the previous Brown Labour regime. It announced an austerity program aimed at cutting the deficit. Additional spending cuts have been announced since along with raising Britain’s VAT from 17.5% to 20%. In a contrast to the French approach, the British government has pledged to reduce the company tax rate from 28% to 23% by 2015.

So several questions remain. Will Hollande’s approach succeed in reducing the deficit? Will the tax hike on the rich lead to a mass exodus? To London, perhaps? What will be the other critical outcomes — on unemployment, growth and poverty? And will France be able to keep its generous social security network?

Comparing answers across the Channel will provide valuable pointers for economic management elsewhere in Europe. And beyond.

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    c k
    Posted Monday, 1 October 2012 at 7:52 pm | Permalink

    Wow. What a bad idea. He has guaranteed a further budget blowout there. Why would anyone pay tax in France now?

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