Emmanuel Macron’s Revolution Is a Long Time Coming

(Bloomberg Opinion) -- If you thought Emmanuel Macron would use his 2019 budget to rethink his increasingly unpopular presidency, think again. The French leader is doubling down on the pro-business agenda that he’s been pushing through since taking power last year.

There’s nothing wrong with this. Macron’s pitch to voters was that he would speed up growth by cutting the role of the state and helping companies become more competitive. He’s merely trying to deliver on this promise.

Yet while the direction of travel is clear, the speed of change is too slow. In the short-term, the budget won’t do much to boost France’s sub-par growth or sharply reduce an unemployment rate above 9 percent. It also risks reinforcing Macron’s image as “president of the rich.” Ordinary French people will barely feel the difference.

The budget includes nearly 25 billion euros ($29.4 billion) in tax cuts, with about 19 billion euros going to employers and 6 billion euros to families. While this sounds like a lot, much of the reduction comes from one-off measures that will largely favor business. The permanent changes are more modest, including a cut in corporation tax and in the cost of hiring low-paid workers.

Macron has vowed to keep the public finances in order, which makes sense when public debt stands at nearly 100 per cent of gross domestic product and the economy is growing. This leaves little room to cut taxes by raising the deficit. Overall, headline borrowing will rise from 2.6 percent of GDP to 2.8 percent, but in fairness this is down to the one-off transformation of a tax credit into a tax cut. In the absence of that measure, the French Treasury says the budget deficit would have fallen to 1.9 percent. That’s an improvement in the structural balance of about 0.3 per cent of GDP, higher than this year.

The government could have found more money to boost competitiveness by cutting deeper into day-to-day outlays. However, it chose an uncomfortable half-way. Public spending will increase by 0.6 percent of GDP. This is lower than the rate of growth of GDP, which should help reduce the state’s large share of the French economy. However, it’s hardly radical. It is higher than this year, when it stayed flat.

The budget is part of Macron’s three-pronged attempt to reboot the French economy: Cut taxes, rein in spending and restrain the budget deficit. The aim is to reduce the tax wedge – the difference between the cost of a worker to a company and his take-home pay (which is the fourth-highest in the OECD) – and reduce corporation tax to 25 percent by 2022. All of that should make French companies more competitive, boost investment and reduce unemployment.

But the budget adjustments are much too small to make a big difference. All the one-off measures and the limited action on spending mean that improvements for French companies are still limited and temporary. While there’s a change of philosophy from the deeply unexciting presidency of Francois Hollande, the revolution is yet to come. In the absence of a sustained economic acceleration in the euro zone, which is unlikely, France will struggle.

And even though he’s treading carefully, these moves will do little to make Macron more beloved by the left-behind. Indeed, his problem is as much perception as substance. Two weeks ago, the president launched an 8 billion-euro anti-poverty plan, aimed at putting the unemployed back on the job ladder. But these measures risk being ignored so long as the economy doesn’t accelerate. Meanwhile, the president isn’t helping himself. A recent incident with a young unemployed gardener, who was told there were plenty of jobs if only he went to get them, was politically tin-eared to say the least.

Macron doesn’t really need to change his economic agenda, more just speed it up. If he manages to attract investment into France, that will boost growth and political support. Meanwhile, more humility would help. The man who compared himself to Jupiter needs to reconnect with ordinary mortals.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

©2018 Bloomberg L.P.