The economic situation is at the center of debate and will remain so throughout the electoral campaign for the Presidential and legislative elections.
But, as they say, “one must know to be able to decide.” This is often what decision-makers lack, as they are more inclined to assert their ideas and theses. A reflection is necessary, without bias but in search of the best or the least worst.
In order to provide recommendations in terms of economic policies, a status report on budgetary constraints, as well as the main weaknesses of the French productive system, is necessary.
Degraded Public Finances and External Competitiveness
First observation, French public debt, as a proportion of GDP, has significantly increased recently. France does benefit from relatively low interest rates compared to other countries, but a downgrade could cause them to rise, requiring considerable budgetary effort.
Second observation, the specific role played by Germany within Europe. The German trade surplus stems from competitiveness achieved at the cost of wage restraint imposed over the last fifteen years. This experience seems difficult to generalize to all European countries precisely because German growth has been mainly driven by external demand, notably European.
Different scenarios are possible, depending on whether Germany draws closer to other economies by boosting its own demand, whether the eurozone ends up no longer being able to contain growing imbalances, or whether European economies follow the German example of wage restraint.
The most likely trajectory seems to be a partial alignment of economies with Germany.
At the very least, it appears that France’s room for maneuver is reduced and that a recovery of market shares in exports would be welcome.
This recovery could result from efforts to slow the rise in production costs, notably through taxation on labor costs. It could also be activated by ambitious industrial policies instead of poorly directed productive investment and low innovation expenditures.
At the macroeconomic level, the French investment rate is quite comparable to that of developed economies like Germany or the United States.
However, this overall observation masks a strong heterogeneity according to the size of companies. Specifically, it appears that smaller companies tend to invest significantly less than in Germany, which could be explained by more difficult access to credit. In sectoral terms, investment appears relatively weak for intermediate goods, consumer goods, as well as capital goods.
Finally, the information technology content of new investments made in France, embodying the diffusion of innovative technologies, is significantly lower than in the United States or the United Kingdom.
French domestic R&D expenditures are also lagging; the relative weakness of French patenting propensity demonstrates the insufficiency of innovation production.
This status report is complemented by a precise analysis of the financial situation of French companies.
The savings rate and self-financing rate of businesses have been distinctly on the decline since the late 1990s.
The profitability rate of French companies has also seen a notable decline, albeit more recent. This joint evolution of savings and profitability rates is, in all likelihood, the symptom of a real financial fragility.
The debt ratio of French companies appears, for its part, intermediate between the high Spanish and British levels on one hand, and the lower German and American levels on the other.
The cost of credit for smaller businesses is also significantly higher than that granted to larger companies, with the differential being over 1%.
How to boost growth and consolidate public finances?
The “third way” in economic policy consists of favoring policies that have a strong effect in the medium and long term, without neglecting the question of their financing.
The selected policies, focusing on the supply side, are divided into horizontal and vertical policies:
• vertical policies, a modern version of industrial policy, seek to support the development of dynamic sectors like health, cleantech;
• horizontal policies aim to stimulate the production of knowledge, to develop flexicurity in the labor market, and to further liberalize the goods market.
A New Industrial Policy
A rethought industrial policy is necessary for the following reasons:
• in fact, in crisis situations, states protect certain industrial sectors deemed critical, such as the automotive industry;
• European economies must be able to export to balance their current accounts; deindustrialization and specialization in non-tradable service activities in
Spain or Greece have led to considerable external deficits for these countries, while Germany accumulates surpluses.
Markets doubt the ability of some eurozone member states
to repay their sovereign debts and of the eurozone to protect these states from specific attacks. The risk premiums associated with Greek sovereign debt illustrate this situation well;
• R&D is primarily conducted in industry (85%);
• European policies of dismantling dominant national positions have proven their effectiveness, but common policies based on cooperation (R&D, currency, and especially
competition) that should take over are now being challenged;
• industrial policies pursued after World War II, based on the protection of certain sectors, combined with a national preference in public procurement, proved very effective (Japan, South Korea). Even if these policies were later criticized for arbitrarily choosing which “national champions” would be supported, it would be illusory to think that economic policy could be perfectly neutral on the sectoral organization of the productive apparatus.
To propose a fruitful orientation for industrial policy, the authors draw on several recent empirical studies
that establish the following outcomes:
• transitioning to a green economy requires subsidies to “clean” sectors: the cumulative phenomenon of “path dependence” makes the transition to green technologies all the less likely as companies have accumulated expertise in polluting sectors; state assistance to redirect them is therefore necessary;
• sectoral aid is all the more useful for sector exports when companies’ access to bank and market financing is difficult;
• sectoral aid is all the more effective (in terms of export market shares) when it is decided at a decentralized level, advocating for the constitution of clusters;
• sectoral aids seem all the more effective when the targeted sector is more competitive;
• finally, and this result is counterintuitive, within the same sector, aid produces more effects when it is not concentrated, meaning it is “sprinkled” over a wide range of businesses. However, this would only be valid on the scale of large markets, like China, the United States, or even Europe.
The desired sectoral policy by the authors focuses on activities that have not yet fully migrated to emerging countries – health, clean energies, digital.
It benefits from being based on competitiveness clusters and should be
implemented at different levels – European, national, or local – depending on the tool of sectoral policy promotion used.
A Horizontal Growth Policy
Six axes of horizontal policies are highlighted:
• investment in higher education should continue. The LRU law, designed to allow the emergence of more performing universities both in terms of research and professional integration, is just beginning to bear fruit. However, these efforts should not hide the weaknesses of primary and secondary education, as evidenced by the alarming results of the latest PISA survey by the OECD.
A recent study highlights that in France, the supervision of students by teachers is relatively weak: the issue of resources and the efficient use of existing resources deserve to be debated;
• support for competitiveness notably involves fiscal measures (transfer of a portion of social contributions) and the development of green taxation;
• appropriate incentives for raising participation rates in the labor market should be conceived: incentives for job-study combinations for young people, extension of relaxed conditions for pursuing professional activity beyond the age of 65.
As for the low-skilled, the authors note that the minimum wage has seen substantial revaluations, thus harming the employment of the least qualified. Moderating the minimum wage, coupled with an increase in resources deployed in the fight against poverty through RSA (active solidarity income), is desirable;
• the goods and labor markets are too rigid. In the goods market, barriers to entry in many professions (taxis, notaries…) should be loosened, except for medical professions, all while avoiding spoliation of professionals who had to acquire their licenses. Additionally, certain sectors (transport, retail, electricity…) are characterized by anti-competitive regulations, which need to be relaxed.
For example, authorizations for large retail stores should be based exclusively on competitive considerations. Quantitative assessments suggest that a substantial easing of the goods market would result in a half-point GDP growth, which is significant.
Regarding the labor market, the security aspect of flexicurity is currently very insufficient. In particular, training rights are still hard to transfer and remain attached to jobs rather than workers.
Moreover, continuous training is too specific, whereas it should be general to allow for adaptation to new employment. A bonus-malus system on unemployment insurance contributions,
based on the proportion of employees in degree training, would be an incentive tool aimed at employers. Finally, acquired rights should not depend on seniority in a particular company but should be accumulated on individual accounts;
• a temporary effort, in response to the crisis, to encourage investment more should be undertaken in different ways: a reduction in tax on reinvested profits and the maintenance and recalibration of the research tax credit which, despite tax optimization strategies it has prompted, clearly strengthens France’s attractiveness;
• the Grand Loan of 35 billion euros was an original and central initiative around which investment efforts in intelligence will be deployed.
While it is legitimate to harbor ambitious hopes, it is important to note the pitfalls to avoid. First of all, excessive sprinkling would prevent the emergence of excellent universities. Furthermore, selecting certain projects risks substituting declining budget expenditure with short-term objectives instead of complementing it with long-term goals.
Finally, the non-consumptive nature of a considerable portion of the budget and the weakness of bond yields make articulation with private financing more than necessary.
A Tax Reform Serving Growth
The proposed tax reform aims not only to provide the necessary resources for the previously presented expenditures (knowledge spending, competitiveness stimulation),
but also to address the major shortcomings of the current tax system. Among them, the overly heavy social charges burdening salaried employment, insufficient progressivity in levies, and an underutilization of minimally distortive levies, like inheritance taxes.
The consolidation of spending requires arbitration, painful as it may be, such as the reduction of the most costly tax loopholes whose effects on employment are the least evident, for example, the reduction of VAT on catering and construction, and the tax exemption of overtime work which has not had the expected effect in terms of job creation.
The re-examination of other loopholes would also be possible.
A second proposition involves transferring social contributions funding non-contributory expenses (health insurance excluding daily allowances and family benefits) to the CSG.
Besides, nothing justifies that benefits independent of work income should be funded exclusively by these same incomes. The transfer to the CSG would considerably broaden the base, including capital income.
As such, with unchanged benefits, a reduction of up to 6 points of contribution could be considered, but this transfer raises technical difficulties and would clearly require time.
The reintroduction of an additional dose of progressivity would, on the other hand, have the double advantage of providing additional revenue and making measures demanding effort from everyone, like wage moderation, more easily acceptable. Besides the elimination of the tax shield, creating an additional income tax bracket, and lowering the caps on tax credits could be considered.
Part of the resources could be directed toward extending the RSA to those under 25.
Conversely, inheritance taxes, which represent only 0.4% of GDP, could be abandoned.
