On the 27th September 2017, the French government presented its 2018 draft budget law, the first of its mandate. Highly anticipated, this draft budget includes a €6.6bn EUR lower tax burden, benefitting households and businesses.
As announced during the presidential campaign, this draft budget reforms several taxes to meet two objectives: slash deficit from 2.9% of GDP this year (according to official forecasts) to 2.6% and support growth and employment. To achieve this, the government has opted for lower public spending to offset tax cuts.
The 2018 draft budget incorporates a corporate tax rate cut from 33.3% to 28% on profits up to 500,000 EUR, as was previously included in the 2017 budget law. The major tax cuts for businesses comes from the competitiveness and employment tax credit (CICE) rate increase of 6% to 7% of payroll for 2017 income – and will therefore be paid in 2018.
This measure was previously included in the 2017 budget law. For 2018 revenues, the CICE rate will be lowered from 7% to 6% of the payroll up to 2.5 times the SMIC (French minimum wage), which will lead to a tax increase for businesses in 2019 which, in theory, will be substantially offset by lower employer contributions.
The transformation of the CICE into a lasting reduction of employer contributions, a campaign promise of President Emmanuel Macron, will only take place in 2019, due to the substantial cost of this reform (20bn EUR) for the year the system switches from one structure to another. Consequently, as tax cuts for 2018 were already fixed in the 2017 budget law, corporate investment will continue to be mainly driven by the current favourable global environment.
The government introduced a 30% flat tax on all capital gains (PFU) - until now subject to income tax brackets – to simplify the tax system and reduce investor uncertainty. In addition, the wealth tax (ISF) will be converted into a real estate wealth tax (IFI), which will only apply to real estate assets. Brackets and rates will remain unchanged. These measures aim to discourage real estate investment, assimilated to a land rent, in favour of investment in productive and innovative activities.
As promised during Mr Macron’s election campaign, employee social contributions will be removed. However, to reduce the cost in 2018, the government will abolish it in two phases (January and September). The government also plans to reduce housing tax, that will affect about 80% of households, by one third. Although the tax is levied by municipalities, the cost of this will be borne by the state. To finance these tax cuts, the government will increase the Generalised Social Contribution (CSG) by 1.7 points.
Although the fiscal reform will result in both winners and losers, as the conditions for employee social contributions and CSG (paid by both workers and retirees) are not the same, the total net effect on household income will be limited. This in large part will be due to the lag between the increase in CSG and the reduction in social contributions. Overall, the reduction in household levies will partially be offset by tax increases. In addition, some of the announced cost savings (housing and healthcare spending cuts,) will directly affect household social benefits.
Risks
1) The fiscal measures taken by the government in the 2018 budget aim to attract investors. On this basis, the government converted the wealth tax. According to its estimates, this tax has driven 10 000 people abroad since 2002.
However, this measure is largely symbolic: although France is one of the few European countries to levy a wealth tax, there is no guarantee its conversion to a real estate wealth tax will lead to a massive influx of new investors. A potential drawback of this measure - and of the PFU on capital gains - is a possible increase in income inequalities, which is the left wing parties’ main argument against this budget.
2) The macroeconomic scenario underpinning this 2018 draft budget is plausible (in line with Coface’s 2018 GDP growth forecast: 1.7%). However, there are still uncertainties about the significant expenditure savings (15-billion EUR), which are expected to finance the support measures without increasing public deficit. The High Council of Public Finance (HCFP) has stated that these savings, in particular regarding healthcare spending (4.2-billion EUR) and territorial authorities’ expenditures (2.6-billion EUR) cuts “that are largely based on a bet”, are subject to "significant downside risks".
In addition, the cost of some measures could be higher than expected. According to a paper of the independent research center French Economic Observatory (OFCE), setting up a PFU on all capital gains at 30% would cost an estimated EUR4-billion - much higher than government’s estimate of 1.3-billion.
3) Despite the narrowing public deficit, debt will remain unchanged at 96.8% of GDP in 2018 – and will rise to 97.1% in 2019 before decreasing slightly in 2020, one of the highest levels in the euro zone. In addition, according to the European Commission’s Spring Forecast, France will be one of the few EU members that will not reduce its debt ratio, along with Romania, Poland and Finland – though these countries hold much lower debt (between 40% and 66% of GDP).
Furthermore, the HCFP emphasised that the structural deficit adjustment path (0.1 pp) is too slow in 2018 and does not take advantage of the current favourable economic situation.
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