IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
This article appeared in The Wall Street Journal
In next year’s French presidential elections, it seems increasingly likely that voters will be asked to choose between two types of statism: statism of the left and statism of the right. Over the weekend François Hollande won the final round of the Socialist Party primaries, handily besting party leader Martine Aubry, and is now set to face off against France’s ostensibly center-right president, Nicolas Sarkozy.
Mr. Hollande is an unlikely candidate for the presidency. He served as François Mitterrand’s nationalization adviser during the 1981 elections but has held no national ministerial positions since. Like nearly all of France’s civil and political elite, he is a graduate of the École Nationale d’Administration, but he has spent his recent political career in regional government, in central France’s largely depopulated Corrèze region which still manages to be one of the country’s most indebted areas. He has scant international experience. Ms. Aubry is nicknamed "the lady of the 35 hours" for advocating for the popular workweek law as minister of social affairs under Lionel Jospin. Mr. Hollande’s socialist bona fides are slim by comparison.
But despite his atypical résumé, there seems little chance that Mr. Hollande will cast himself as a French Tony Blair and transform the Socialist Party. His agenda revolves around old Marxist remedies whose principal agents are the state and its spending. To address France’s 9.9% unemployment rate, Mr. Hollande wants to hire 60,000 people for the state education system, an already bloated department that annually costs more than €60 billion euros, or roughly 7% of GDP. Mr. Hollande’s Socialists are also offering "generational contracts," or government-subsidized jobs for people under 25 and past retirement age. Through tax carve-outs and other goodies, businesses will be encouraged to hire and retain politically favored young and old workers, regardless of whether they are productive or not.
Finally, Mr. Hollande has been very clear: He does not like rich people. Anyone taking home more than €4,000 per month after taxes should be paying higher taxes, according to Mr. Hollande. Don’t expect Mr. Hollande to temper this stance as next April approaches. To win the presidency, Mr. Hollande will now have to unite France’s Socialists and seek the support of his former opponents: Ms. Aubry, the 2007 candidate Ségolène Royal and Arnaud Montebourg, all of whom have promised even more state intervention than Mr. Hollande is. Mr. Montebourg, a lawyer who won 17% of the Socialist vote in the first round of the primaries, has even advocated that France shut its borders and nationalize banks and other companies, earning himself a reputation as a white knight among the anti-globalization crowd.
Most disturbing, though, is the fact that France’s center-right option doesn’t look all that much different. To judge by the last four and a half years, the supposedly free-market Mr. Sarkozy also sees the state as the best remedy for France’s problems. His government has responded to its debt and financial crisis with a new tax on high incomes, higher taxes on capital gains from real-estate, a proposed tax on financial transactions and even a tax on soft drinks. Under Mr. Sarkozy, France’s total tax take today equals roughly 44% of French GDP, versus about 42.8% in 2008 and an OECD average of 36.5%. Overall tax rates are predicted to rise by 7.6% in 2012, and income-tax rates by 13.3%.
This additional revenue won’t even cover the French state’s €366 billion expected 2012 spending, which is due to incur an €82 billion public deficit and a €1.7 trillion public debt worth 85% of GDP. And despite all this, Mr. Sarkozy continues to fatten the state, which now employs roughly 90 out of every 1,000 people in France—almost twice the ratio in Germany and the Netherlands.
None of these policies appear to have done much for French growth, but there is no sign that Mr. Sarkozy would use a second term to change course and institute dramatic spending cuts, as his counterparts in Britain, Ireland, Spain and Portugal have done. A lot could happen between now and April, but for now, France’s future looks bleak regardless of who wins the presidency.