For seven long years, this was a red line that Emmanuel Macron, his successive Prime Ministers and Bruno Le Maire had promised not to cross. But just a few days after his arrival at Matignon, Michel Barnier could go back on this promise. Faced with the budgetary emergency, the former European Commissioner is reportedly considering implementing tax increases. In his sights: the wealthiest businesses and households. A hypothesis that has caused a stir within his own political family, Les Républicains, and the former presidential majority.
“The budgetary situation of the country that I am discovering is very serious. I have requested all the elements to assess its exact reality. This situation deserves better than little phrases. It demands responsibility,” Michel Barnier declared to AFP on Wednesday, September 18. To the point of taking radical decisions and breaking with the supply-side policy undertaken by the head of state since he came to power? Interviewed by L’Express, Olivier Klein, CEO of Lazard Frères Banque and professor of economics at HEC Paris, believes that an increase in compulsory levies would be a mistake that would weigh heavily on our economy. However, he advocates the activation of other levers such as innovation and investment.
L’Express: Do you think that increasing compulsory deductions would be a mistake?
Olivier Klein: The diagnosis is correct. We obviously have a public deficit and a public debt that are too high. We cannot deny it and being aware of it is already very important to be able to deal with it. The question is: how to resolve it? We have several policies at our disposal: increasing compulsory levies, reducing public spending or even structural reforms and future investment to increase growth potential. One could quite simply believe that we are going to do a dose of each measure in order to reduce the public deficit, and that this would be good for social justice. However, this is what I question.
For what ?
In France, we currently have a problem of supply and not demand, as the Draghi report has just highlighted for the whole of Europe. However, this has not always been the case and it depends on the period. In France, in particular, we have a strong competitiveness deficit because the range of products that we manufacture does not correspond to the prices at which they are sold. There are two ways to adjust. Either we lower wages and prices, with the same quality. But then we affect living standards, this is not really a solution to be preferred.
Either we make structural reforms and investments for the future to encourage innovation and improve the range of what we produce. To do this, we must be able to ensure that companies have sufficient profits. However, the rates of compulsory levies in France are already among the highest in the eurozone. Raising taxes on companies when, on the contrary, they should invest and improve the offer, would produce the opposite of the desired effects.
What about households?
If businesses are less competitive, the employment rate will inevitably decrease, whereas it had managed to rise over the past seven years thanks to the supply-side policy implemented by the government. We will then damage purchasing power and equality of opportunity. Ultimately, it is public finances that will find themselves further deteriorated. There will be less national production, fewer results for businesses and therefore less income distributed. We will once again enter the vicious circle in which we have been for decades. We will give ourselves the illusion in the short term of having reduced the public deficit, while deteriorating it two years later.
What do you think of the expression “tax justice” used by Michel Barnier?
Before saying that, we need to look at the figures. We have the highest redistribution rate among OECD countries. There is no problem with tax justice. We must not accentuate the vicious circle. Let us instead work on equality of opportunity, which is not sufficient in France.
This is not the time to lower taxes, nor to raise them further because that would worsen the situation we are in, namely a very high trade deficit and compulsory levies among the highest in the eurozone. We need to have a dynamic view of the economy. It is not a zero-sum game. Be careful not to make a misdiagnosis.
Would a temporary tax increase, as recommended by the Governor of the Bank of France, be a good compromise?
This is not an economic decision, but a purely political one. Every time we have decreed that taxes would be temporary, they have been maintained. Very few people will therefore believe this because they have already experienced it. The French will say to themselves that there is less purchasing power and will therefore spend less. As for businesses, they will invest less for the same reasons. This must not be an excuse for not acting on spending, which is, I recognize, a very complicated exercise.
How to explain it?
We need to be able to explain why and how we do it and support people to show that they are not necessarily losers. This necessarily takes time. Furthermore, if we went too fast, it would have a negative impact on the economy. When some economists tell us that the choice to increase taxes or reduce spending is a political choice, I think they are not sufficiently reflecting economic reality. In the situation we are in in France, the consequences could turn out to be divergent. Reducing spending regularly in a committed way and not abruptly would have growth benefits. Raising taxes further will have a degrowth effect. The final effect on the economy and public finances will therefore be very different.
Doesn’t the current debate about tax increases actually demonstrate our inability to sustainably reduce our public spending?
So far, we have not addressed the problem in a very solid and serious way. We have a rate of public education expenditure in relation to GDP that is higher than the European average. However, we see in studies, such as the Pisa ranking, that we are lagging behind. In addition, teachers are paid less than in Germany, for example. This is also the case in health, and the same goes for nurses’ salaries. The organisation must be rethought and we must improve the efficiency of our public spending. Only this will be sustainable.
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