France has been the second worst performing G7 economy after the US over the year to 1 July and dou...
France has been the second worst performing G7 economy after the US over the year to 1 July and doubts abound about whether recently re-elected president Jacques Chirac can bring about the structural reforms needed to turn it around.
Chirac rode to success on the back of concern over right-wing opponent Jean-Marie Le Pen and the promise of sweeping income and corporation tax cuts.
While the prospect of reduced income and corporate taxes should provide a boost to individuals and certain areas of the market, Raj Shant, head of European equities at Newton Investment Management, argues Chirac would be better off dealing with the country's inherent structural problems. He says: 'The proposals for reducing income tax for individuals and corporate tax are quite encouraging from a local point of view. But what would be more promising are structural reforms and a reduction in the size of the government and civil service staff.
'France is very bureaucratic and a substantial chunk of its workforce is working for the state in some guise and often on more attractive salaries and pensions than they would get in the private sector. It would be very unpopular to reform this structural inefficiency, whereas tax cuts are more politically popular.'
Stephen Potter, an analyst at Goldman Sachs, adds the plans entail the reduction of taxes and social contributions to the tune of 2% of GDP per annum, while simultaneously increasing priority spending on areas such as defence and hospitals.
While not opposed to the tax cuts in principal, Potter is concerned they will not fit in with the planned budgetary increases in other areas and notes Chirac has shrewdly passed the plans on to his prime minister Jean-Pierre Raffarin, somewhat distancing himself from the proposals.
He says: 'President Chirac will prefer to bypass the 2004 budget deficit deadline than to renege on his electoral promises. The president does not want to repeat the 1995-1997 experience when he had to increase taxes just after presidential elections, a result that arguably led to a big loss of popularity and the defeat in the 1997 elections.'
That said, Potter fears that to ignore the budget deficit issue will weaken confidence in the Chirac regime's grasp of the economy and could force the European Commission into action if it feels France is wilfully ignoring its agreements.
Shant says the French government, like its German and Italian counterparts, is close to breaching the eurozone Growth and Stability pact, an agreement limiting government deficits within eurozone countries.
Shant says: 'In some ways you could take a view that it may not be a bad thing if it causes the French government to rein in its spending. The European council of financial ministers has been reasonably pragmatic thus far, but it looks as if the agreement may fall by the wayside.'
On a local level, Shant says the tax cuts, when introduced, will lead to increased levels of disposable income, which will benefit a number of sectors.
He says: 'Additional disposable income could potentially benefit the retail sector and domestic consumption in general. A reduction in corporate tax will be positive. Anything that makes it easier for French companies to invest and grow their operations in France or abroad is positive.'
Tax cuts to boost disposable income.
Reduction of tax burden on companies.
Domestic-facing companies to benefit.
‘Important to have an anchor’
Report to be written by TPR
Lack of innovation for solutions
Some 2,000 consumers affected