Research Dept. News
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Monthly Report, num 284 - October 2005
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European Union - France
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France: fiscal reform aimed at recovery in consumption
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France: Villepin government launches reform of income tax aimed at improving spending capacity of French households.
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If we had to point out one characteristic factor in France’s recent economic policy it would be the efforts carried out to ensure that households maintained sufficient spending capacity. Household consumption has acted as the engine of growth in recent years but since the third quarter of 2004 it has been more up and down. This lies behind the orientation of Dominique de Villepin’s new government, aimed at improving employment and income tax, two factors which have a direct effect on middle-class consumer capacity.
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As a result, after introducing various measures to make labour laws more flexible for small French companies, on September 14 the Minister of Economy, Thierry Breton, made public the general features of income tax reform. These involved a reduction in the number of tax tables from the current 7 to 5; a reduction in the highest rate which goes to 40% as against the 48% now being applied; and finally, establishment of a limit on the direct tax load equivalent of a maximum of 60% of taxpayer income. If this reform goes ahead it will be applied on income generated in 2006 so that taxpayers will fully see results in 2007, an election year.
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Doubts exist about sustainability of recovery in consumption.
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Apart from these economic policy measures, the latest available indicators, specifically the monthly figure for domestic consumption (growth of 6% year-to-year in August, an annual high), would seem to support some recovery in consumption. Nevertheless, the low level of consumer confidence as of July throws some doubt on the sustainability of recovery. In this respect, recovery of the labour market is seen as fundamental. Whereas in June and July the unemployment rate was down by three decimals to 9.9%, growth of employment continues low.
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With regard to other recent indicators, it should be pointed out that industrial production was even weaker in July (drop of 0.7% year-to-year) and that consumer prices scarcely showed any signs of increasing with growth of 1.8% year-to-year in August, only marginally higher than the increase in rate recorded in June and July.
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