Macronmania Dims for French Bosses Worried by Tax Cut Delay

(Bloomberg) -- For French President Emmanuel Macron, the economics of governing are suddenly looking complicated: His promise to cut the deficit is coming up against business leaders who feel they are overdue for tax relief.

At the Rencontres Economiques conference in Aix-en-Provence over the weekend, the mood of France’s business elite ranged from hopefulness to disappointment after a week of mixed signals from Macron’s government on whether tax cuts will come as soon as 2018 or would be delayed in the name of deficit-reduction.

“It’s better to see the glass half-full but the new government shouldn’t be aiming to change the country at a leisurely pace,” Philippe Houze, chief executive officer of Galeries Lafayette, a department store operator, said in an interview.  “The confidence is there now but we’re already seeing signs that things are being pushed back. The reforms and the tax cuts need to be done as quickly as possible or the optimism won’t last.”

The main source of disappointment for many was Prime Minister Edouard Philippe’s announcement Tuesday that an overhaul of France’s capital gains and wealth taxes would be pushed back to 2019 from 2018.

“There has to be some progress in the 2018 budget on at least one of the two issues,” Solvay CEO Jean-Pierre Clamadieu said of the wealth and the capital gains taxes. “Time is flying fast. The system mustn’t lose steam. The 2018 budget mustn’t suggest that problems are being kicked down the road. What’s in the works on labor rules and the budget bill must show that reforms are being introduced.”

Containing Deficits

The problem, of course, is that the government is already struggling to contain a deficit that is on track to be wider than expected in 2017 and shows no sign of falling gently of its own accord. Having failed to deliver a balanced budget since 1974 and having a well-earned reputation for flouting European Union rules, Macron repeatedly said during his election campaign that he would meet those commitments as a matter of gaining credibility on the European stage.

The business community uproar was such that Philippe announced on Saturday that taxes will be cut overall by about 7 billion euros ($8 billion) next year. Macron himself has now decided to shift back to making the wealth tax changes in 2018, Les Echos newspaper reported Monday.

Almost all executives acknowledged that Macron’s election had triggered an increase in confidence and that his government’s efforts to reform the labor market are critical. Discussion of that reform gets underway at the National Assembly Monday.

Executives are wary of broken promises, having seen generations of politicians drive up France’s tax burden to 46 percent of gross domestic product and public spending up to more than 56 percent, among the highest in the world.

‘Set in Stone’

People are “a bit worried, a bit disappointed, but at the same time he did say that he would write it down in the law,” Jacques Aschenbroich, chief executive of auto-parts maker Valeo, said on the sidelines of the conference. “So if it is set in stone and if it’s only a matter of timing, it’s not an issue. What we need is that our politicians respect what they said.”

For economists, the criticism is a matter of the signals the government is sending. Jean-Herve Lorenzi, the Rothschild France economist who is the main organizer of the conference, addressed the issue head-on with Finance Minister Bruno Le Maire in his closing address.

“Taxation of capital is a major issue and cutting it a signal that will boost this country,” he said with Le Maire on stage. “It will tempt people who have left to return. We hope that it will be made a priority again next week.”

Philippe Aghion, who was an economist at Harvard University and who advised former President Francois Hollande before he took office in 2012, agreed. “They need to send a very strong signal,” he said. “Growth is something you influence.”

Squaring the Circle

The task of squaring the circle falls to Le Maire, who after meeting with the business leaders in the south of France Sunday travels to Brussels Monday to explain the budgetary and economic outlook to fellow euro-group finance ministers.

At the conference and in an interview with BFM television Sunday he sought to be reassuring, emphasizing that he has a plan: to cut government spending enough to allow both the deficit and taxes to decline.

“We need to give the maximum power to our policies at the beginning of the five-year presidential term,” he said. “All the messages we’re sending are about a deep transformation of the French economy. All the messages are about re-establishing the confidence of the French in their economy and creating prosperity and jobs. We need to hit the road from the start.”

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net, Francois de Beaupuy in Paris at fdebeaupuy@bloomberg.net, Alexandre Boksenbaum-Granier in Paris at aboksenbaumg@bloomberg.net, Ania Nussbaum in Paris at anussbaum5@bloomberg.net.

To contact the editors responsible for this story: Geraldine Amiel at gamiel@bloomberg.net, Vidya Root, Ben Sills