The French government presented a 2020 budget to deliver the tax cuts French President Emmanuel Macron promised to the “yellow vest” protesters, marking a shift that strains the public finances and gives the economy a boost as the outlook darkens.
According to the draft budget, the lowest income tax rate would be cut to 11 percent from 14 percent, housing levies would continue to be phased out and low earners would get a bigger state bonus.
However, the plans come at a cost, with slower progress on the budget deficit and the debt ratio staying close to 100 percent of output.
The structural deficit — which strips out the impact of the economic cycle and one-offs — will be largely unchanged.
“We want to respond to the social crisis France has been through, and we want to respond to the marked slowdown in global and euro-zone growth,” French Minister of Finance Bruno Le Maire said.
Macron’s third budget as president is a switch away from the pro-business path set during the first half of his five-year term. That became a political necessity during the yellow vest upheaval, when protests against fuel taxes morphed into broader, sometimes violent, movement demanding improved living conditions.
The tax cuts for business in the budget amount to about 1 billion euros (US$1.09 billion), compared with more than 9 billion euros for households. The budget would also close tax exemptions and loopholes for companies.
Macron’s response to the yellow vests has also given France a timely fiscal stimulus. The government expects economic growth of 1.4 percent this year and 1.3 percent next year, outpacing Germany after years of lagging behind.
In France, consumer confidence is higher than before the protests and spending on manufactured goods has risen for four consecutive months through August.
“We can be proud of how the French economy is weathering the storm. France is an exception in the euro area,” Le Maire said.
Still, there are signs Macron must tread carefully. Earlier this week, the government was forced to drop a plan to reduce tax benefits for the elderly, after an outcry from lawmakers in opposition parties and Macron’s ruling majority.
The generous budget also means France has less ammunition left if the economy takes another turn for the worse.
Le Maire said he would not let debt rise any further and other countries with fiscal leeway — particularly Germany — must take more responsibility for boosting the eurozone economy.
“Germany must invest and it must invest now,” Le Maire said. “Let’s not wait for the economic situation to get worse.”
France’s main savings for next year would come from cuts to unemployment benefits, housing subsidies and the budget of state-owned media. About 650 million euros would come from closing tax benefits for companies.
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