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(Bloomberg) — The French government is studying targeted taxes on the wealthy and large companies as it tries to navigate an urgent need to repair finances without undoing President Emmanuel Macron’s pro-growth reforms, newly appointed Finance Minister Antoine Armand said.
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His comments come as investors ditch French assets amid political turmoil, with the risk premium on the country’s debt approaching its highest since the euro-area crisis.
“Apart from one or two years of exceptional crisis in the last 50 years, we have one of the worst deficits in our history,” Armand told France Inter radio on Tuesday.
“The question we need to ask is how can everyone contribute intelligently given the gravity of the budgetary situation,” he said, adding that possible additional taxation mustn’t hamper growth and job creation.
Armand reaffirmed that the administration of Prime Minister Michel Barnier would not increase the burden on working people and the middle classes but said making the wealthy pay a minimum of tax is “an interesting avenue.”
The government is under pressure to find quick solutions to the country’s fiscal challenges and must present a budget bill for 2025 to parliament in the coming weeks. Barnier indicated on Sunday that he will make the country’s biggest companies and wealthiest individuals pay more tax in an effort to tackle the massive budget deficit.
A gauge of French bond risk — the gap between French and German 10-year yields — is at the highest since anxiety over the country’s politics was at its peak this summer. Citigroup expects it to widen to as much as 100 basis points next year, up from around 80 now. Meanwhile, French stocks have slid more than 6% from when President Emmanuel Macron called snap elections on June 9.
The calibration of the budget is crucial to restoring investor confidence. France has slipped so far from its long-term plans to reduce the deficit that an enormous effort would be required to get back on a path to meet a target of reducing the shortfall to within the European Union’s limit of 3% of economic output by 2027.
Bank of France Governor Francois Villeroy de Galhau has said that attempting such rapid consolidation would no longer be credible or wise, and that the new government should instead negotiate with the EU for an adjustment spread over five years. According to the European Central Bank Governing Council member, most of the effort should come from spending cuts, though targeted taxes that don’t hurt economic confidence should also be used.
Raising taxes is a contentious issue, even in Barnier’s new cabinet, as lawmakers are reluctant to reverse seven years of Macron’s pro-business policies, which they say have restored France’s economic fortunes. Yet opposition parties in parliament have made increasing taxes on the rich a cornerstone of their economic proposals.
Barnier will give more clarity on his plans when he presents his policy agenda to parliament on Oct. 1.
“Today, markets are giving the benefit of the doubt to France and there are all the mechanisms of the ECB, but if France said ‘forget all that and we will leave the budget deficit to rise,’ we’d quickly be in a much more serious crisis,” Societe Generale Chief Economist Michala Marcussen said. “But for a fiscal consolidation to work it must be seen as fair with everyone contributing one way or another.”
Patrick Martin, the head of French business lobby Medef, told Franceinfo radio on Tuesday that companies could accept more tax increases so long as the state makes even greater efforts to cut spending.
What Bloomberg Economics Says…
“If Barnier’s government can deliver a credible fiscal strategy that reassures markets and broadly complies with EU rules, it could bolster confidence in France’s economic direction. However, given the political fragility and stretching fiscal targets, the path ahead is fraught with risk.”
—Eleonora Mavroeidi, economist. Click here for full INSIGHT
“If necessary, exceptionally, temporarily, businesses will be able to contribute to a small degree,” he said.
Tax-the-rich policies would mark a significant shift in France after President Emmanuel Macron came to power in 2017 pledging to repair France’s relationship with business. One of his first steps was to shrink the scope of the country’s wealth tax and put in a flat levy on capital, earning him praise from the business community and reproach from detractors who dubbed him the “president of the rich.”
Overall, France remains the European country with the highest tax revenue as a share of economic output.
–With assistance from Benoit Berthelot.
(Updates with economist comment in 12th paragraph.)
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