Institute for Research in Economic and Fiscal issues

IREF Europe - Institute for Research in Economic and Fiscal issues

Fiscal competition
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Hollande is right about cutting public spending

At his press conference on Tuesday 13 November, François Hollande declared that, “Returning to a balanced budget essentially means looking to spending cuts rather than tax increases. Are we better off with 57 per cent of GDP of public spending, whereas it was 52 per cent five years ago?” He is right. This is common sense coming from a socialist president who set out with a policy of tax hikes, practically without touching public expenditure that is the highest among OECD countries. France spends € 150 bn more than Germany per year. Does that mean that the Germans are less well off? The average public spending in Europe is some 48 per cent of GDP.

Other countries that have reduced public spending are not doing worse than before, for instance Canada and Sweden. In the 1990s in Canada, for every dollar in tax increases tax revenues declined by 7 dollars. Sweden started reducing public spending in 1993 and currently stands at 48 per cent of GDP, having privatized swathes of its economy. These countries, and Germany, hardly experienced the crisis because, since 2008 their average growth rate was above 2 per cent, whereas most countries (including France) are approaching or already facing recession.

Moreover, the unemployment rate in these countries is largely below the one in France (6 per cent in Germany) which goes to show that reducing government spending is also conducive to job growth. The French unemployment rate is now above 10 per cent (the highest among the wealthiest countries in the Eurozone, and sixth among the 34 OECD member countries) whereas youth unemployment stands at 23 per cent (three times higher than in Germany and twice that of the United States!).

Economic growth remains very weak, around 0.4 per cent this year and a predicted 0.8 per cent for 2013. Government deficits and debt have continued to deteriorate, including the social insurance deficits (€ 14 bn). The number of wealthy French leaving the country is steadily growing however: since January 2012 there have been three times as many tax exiles than during all of 2011! The most recent one to pull up sticks was Bernard Arnault – the richest Frenchman of all – who is vying for a Belgian passport.

Finally, France is losing its rank among developed countries. In 1970 it held the fifth place in terms of GDP/capita (USD); in 1995 it had slipped to the 8th position, in 2000 to the 12th and in 2011 to the 18th place with a GDP/capita of USD 40,704. Our Welfare State has accelerated this decline.

Yes, president Hollande is right. France is not doing any better by raising its public spending to 57 per cent of GDP. But we now need to get down to work in order to implement genuine reform to reduce government spending and tax rates. Otherwise France runs the risk of being the world’s last Marxist country.

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