France Shuns Austerity With Plan to Cut Debt Burden With Growth

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France set out a plan to tackle its Covid-19 debt mountain by relying on investment to fuel stronger economic growth, resisting any temptation to raise taxes to repair its public finances. 

The 2022 budget will deliver on promises to cut corporate tax -- which stood at more than 33% for some companies when Emmanuel Macron took office in 2017 -- to 25% for all firms. It will also continue the phasing out of residency tax, Finance Minister Bruno Le Maire said. 

Separately, the government is working on the details of a multi-year investment plan worth tens of billions of euros for new industrial sectors, and fresh support for training and employment for young people. 

“This budget is completely coherent with the three strategic choices we have defended from the start of the presidency: cutting taxes, supporting investment and innovation, and supporting French people to work,” Le Maire said. 

 20212022
GDP6%4%
Deficit/GDP8.4%4.8%
Debt/GDPSlightly below 116%114%
Tax/GDP43.7%43.5%
Source: French government  

The plans underscore how European countries are seeking to avoid repeating the sharp spending cuts and tax hikes that followed the global financial crisis, which critics claim choked output for a long period. 

Le Maire said there are signs France’s strategy is already working as budget deficits will be narrower than previously expected this year and next because the economy has rebounded quickly. The government now forecasts a budget shortfall of 4.8% of gross domestic product in 2022 instead of 5.3% previously. 

France Shuns Austerity With Plan to Cut Debt Burden With Growth

“We won’t make the error of consolidating public finances too fast and killing off growth,” Le Maire said. “It is perfectly possible to combine a return to growth and a reasonable reconstruction of public finances.” 

Domestic politics is also playing a role in budget plans as Macron faces elections in April and is under pressure to ween the French economy off emergency aid without disrupting the recovery. Le Maire said that the 2022 deficit will likely end up being more than the official 4.8% once Macron decides on the investment and jobs plans in the coming weeks. 

But the finance minister said that he would ensure the gap is still below the initial forecast. 

“We won’t spend all the fruits of growth -- part of that must go to deficit and debt reduction,” Le Maire said. 

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