French face higher taxes whoever wins presidency


27 Mar 2012
Mathilde Lemoine, Economist

Mathilde Lemoine

The picture is changing in the run-up to the first round of the French presidential election. One poll taken after the terrorist murders in Toulouse and Montauban shows Nicolas Sarkozy, the current president, overtaking François Hollande, the leading Socialist contender, in the first round vote on 22 April. However, Mr Hollande remained the clear favourite to win in the second round on 6 May.

Both leading candidates prefer tax hikes to cuts in public spending – even though French state expenditure was 56.3% of gross domestic product in 2011. Mr Sarkozy, the mainstream right-wing candidate, plans to increase the tax burden to 45.3% of GDP in 2013 while his opponent is proposing a rise to 46.5%. Despite the already high ratio of public-spending-to-GDP, Mr Hollande’s programme provides for a further 1% annual increase while the current president proposes a rise of 0.8% in 2012 and then 0.4% a year until 2016.

Mr Hollande’s lead was already narrowing, even before the Toulouse school shooting on 19 March: an IPSOS poll carried out just before gave him 28.5% of first-round voting intentions compared with 27.5% for Mr Sarkozy. But a poll by IFOP, the other main polling organisation, just afterward suggested Mr Hollande would win 27% and the incumbent 28.5%.

The shootings put security and terrorism firmly on the campaign agenda – themes thought to help Mr Sarkozy’s UMP party and, as president, he directed the hunt for the gunman.

Both candidates are committed to reducing the government’s budget deficit to 3% of GDP in 2013.

But IFOP’s most recent poll still indicates that 54% of voters would support Mr Hollande in May’s second round. IPSOS gave Mr Hollande an even bigger second-round lead – 56% against Mr Sarkozy’s 44%. However, uncertainty persists over how the eliminated candidates’ supporters will vote in the second round.

Both candidates are committed to reducing the government’s budget deficit to 3% of GDP in 2013 but Mr Sarkozy has announced tax increases on top of those already included in his government’s austerity plan. He proposes raising the standard VAT rate from 19.6% to 21.2% from October to finance a cut in family social-security contributions; a sales-related tax on major French companies; higher taxes on dividends; plus a new ‘exit tax’ for those going offshore. Mr Sarkozy expects to raise an additional EUR92bn in taxes and social-security contributions between 2011 and 2013, resulting in an overall tax burden of 45.3% of GDP
in 2013.

Meanwhile Mr Hollande plans higher social-security contributions; higher corporation tax and reduced allowances for big companies; plus a 75% tax on annual incomes exceeding EUR1m and a 45% band for those receiving more than EUR150,000. His measures would yield EUR118bn between 2011 and 2013 and the tax burden could reach 46.5% of GDP in 2013 after 43.7% in 2011.

Mr Hollande is also planning to reverse a pension reform that saves EUR7bn a year and ending the present policy of recruiting only one civil servant when two retire. He thus needs to find another EUR27bn in savings. If he can do that, public expenditure would stabilise at 56.3% of GDP in 2013 after 56.5% in 2012.

However, Mr Hollande has also changed his mind on the European Union’s fiscal compact. His earlier threat to renegotiate the compact put pressure on the eurozone’s sovereign debt market until he said in February he would instead attempt to add provisions on growth. But in March, he said he would not ratify the treaty unless it includes a new section on growth. By casting doubt on the compact, the presidential vote – or the legislative elections in June – could put new pressure on those debt markets.

This report must be read with the disclosures, analyst certifications and the disclaimer.