French architecture in France

France Fiscal October 2019

France: Macron unveils major tax cuts and a lower deficit in 2020 budget

On 27 September, the French government presented its draft 2020 budget, which estimates a deficit of 2.2% of GDP. This is well below the 3.1% of GDP projected this year and would mark the lowest deficit since 2001; however, it is still short of the previously planned 2.0% of GDP shortfall, while the marked reduction of the deficit stems from the absence of a one-off accounting cost owing to the transition to a new tax scheme. Overall, the budget is expected to have a mildly expansionary effect on the economy, as the government unveiled more than EUR 10.0 billion in tax cuts.

The draft budget introduces the additional fiscal leeway promised by President Emmanuel Macron in late 2019 to appease the ‘gilet jaunes’ protesters. Notably, households should benefit the most thanks to EUR 9.3 billion in tax cuts, through lower income tax, the removal of the housing levies, tax exemptions for overtime and re-indexation measures for small pensions. In addition, companies can expect EUR 1.0 billion in cuts, although the impact on businesses is hard to determine as the government intends to plug the fall in revenue partly by closing tax exemptions and loopholes for companies. Additional measures to fund the budget gap are projected to come from lower government expenditure and favorable financing conditions, including negative interest rates on the French 10-year bond.

Notably, however, the budget scraps the planned reduction of the structural deficit, against the recommendations of the European Commission for greater fiscal tightening, and projects the public debt ratio to stay close to 100% of output. Considering that the government’s new 2020 growth forecast of 1.3% is slightly above Consensus, heighten global uncertainties could quickly derail the fiscal plans. Nevertheless, EU officials are likely to approve the draft budget given that the country has been moving forward with key structural reforms. So far, the economy has held up better than some of its European partners thanks to resilient domestic activity. And, looking ahead, French officials remarked that a fiscal easing provides necessary buffers to growth at a time of global economic weakness and uncertainty.

Commenting on the possibility of further fiscal easing, Alain Durré, chief economist at Goldman Sachs in Paris, noted:

“On that basis, the room for additional easing without causing a ‘snowball effect’ in France’s public debt could vary between 0.3% of GDP (as embodied in the 2020 Budget) and 0.4% (our estimate given the government’s conservative assumption for interest rates). We think that part of this fiscal space could be used in the course of next year if the economy slows more than currently anticipated”.

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