France politics: France in 2018: more policy reforms ahead

Content Type
Country Data and Maps
Economist Intelligence Unit
No abstract is available.
Politics, News Analysis, Recent developments
Political Geography
  • In 2018 Emmanuel Macron, the French president, and Édouard Philippe, the prime minister, will focus their reform efforts in three main areas.
  • First, fiscal measures will be implemented to foster investment and with the intention of lowering both corporate and personal taxes.
  • Second, apprenticeship programmes and unemployment benefits will be reformed to move the labour market towards a "flexicurity" model, in which increased unemployment benefits will offset greater labour market flexibility.
  • Third, immigration laws will be changed to welcome more highly skilled migrants, but also to deport migrants who are deemed to have entered the country illegally more swiftly.

Since coming to power in May 2017 Mr Macron and Mr Philippe have passed several reforms, including a controversial labour market bill and a sweeping anti-terror law. In 2018 the government appears determined to use its relatively favourable public approval ratings to press ahead with further reforms. Mr Macron, a former investment banker, aims to improve the (usually negative) opinion that foreign investors have of France, especially with regards to its over-regulated labour market and high tax burden, to boost investor sentiment and attract foreign direct investment.

Fiscal reforms will be implemented for individuals and companies

Fiscal reforms will focus on both personal and corporate taxes, with the aim of simplifying and modernising the currently complex tax system, in which different layers of legislation often overlap. In addition, the government hopes to improve foreign investor sentiment so as to attract some of the international companies and institutions that are looking to relocate to continental Europe after the UK leaves the EU in March 2019. Regarding corporate taxes, the government plans to implement the PACTE (action plan for the growth and transformation of enterprises) reform in mid-2018. This programme should facilitate access to financing, simplify transmission mechanisms (for instance within a family) and develop employee ownership schemes. In 2018 the government will also begin a gradual reduction of the corporate tax rate, to 25% by 2022, from 33% currently. We believe that these reforms will easily be implemented, as they will prove relatively uncontroversial.

The implementation of a massive public investment programme looks more difficult. This plan, announced in July 2017, envisages that the French government will invest EUR50bn in 2018-22 to fight against climate change (EUR15bn), increase education (EUR15bn), improve health levels, fund public transportation and agricultural projects (EUR5bn), and modernise the state-all vague terms that have not been further defined. Little progress seems to have been made over the past six months, and it remains unclear how this investment plan will be funded. It is possible that at least part of the plan will actually overlap with a previous EUR57bn investment plan launched by Nicolas Sarkozy, the then president, in 2010.

Planned changes in the field of personal taxes will also prove contentious. The main change relates to scrapping the housing tax for around 80% of households over three years, and reducing it by 30% on average for the remaining 20%, in an effort to lower the personal tax burden. However, there is a flaw in this plan: housing tax is used to finance local budgets and over the past few years local budgets have been put under considerable pressure as a result of a broad decentralisation process that has given more power to local governments. Under French law, local authorities may not register budget deficits, and their access to the debt markets is severely restricted, with debt only to be used to finance investment, and not operational expenses. The suppression of the housing tax means that French municipalities may therefore have no other option than to increase property and council taxes-which they collect and manage directly-in order to plug their budgets.

Welfare system will be reformed to move towards a flexicurity system

The second area for reform concerns apprenticeship schemes and unemployment benefits. The government aims to improve the matching of training programs to employment needs. The French educational system is often described as two-tier: only a small share of French students go to elite universities, which provide good employment prospects, whereas at the other end of the spectrum many educational programs do not provide students with the skills they need in the job market, leading to high levels of youth unemployment. According to Eurostat, youth unemployment stood at 21.8% in November 2017, compared with 16.2% on average in the EU. In addition, the Observatoire français des conjonctures économiques (OFCE), a think-tank, estimates that around a fifth of French youth (aged 15-29) is not in education, employment or training (NEETs).

The government hopes that it will be able to pass its unemployment benefit reform plan by the beginning of the third quarter of 2018. The main provision of this reform is the creation of universal unemployment benefits (between employment contracts), which will cover categories including self-employed workers and those who resign from their jobs, neither of which are currently covered by state unemployment benefit schemes. In exchange, the government plans to introduce broader controls on unemployed workers, who will have to prove that they are actively looking for a job, and will not be able to refuse more than two job offers if they are to continue receiving benefits. However, critics point out that these provisions already exist but are not implemented, as Pôle Emploi, the French employment agency, lacks the necessary human and financial resources. In addition, the government's assumption that the reduction of unemployment will be sufficient to finance these reforms seems a fairly optimistic view.

Immigration laws will be toughened

The third area for reform relates to immigration. Since coming to power, the government has been widely criticised by both the left and right for its policy towards refugees and asylum-seekers. The left believes that the government is too harsh and that France should welcome more refugees (although many of them prefer to go to Germany or the UK owing to better employment prospects and training programmes); the right believes that the government is too lax and that France should toughen up border controls and streamline deportation procedures.

The government is considering reforms in three areas: reforming the legal procedures applicable to asylum-seekers; increasing the effectiveness of the fight against immigrants entering the country illegally; and improving the integration of all immigrants, especially those that are highly skilled. According to a draft plan presented by Mr Philippe, asylum-seekers would receive a formal response regarding their application within 90 days (compared with 120 days currently), but would only be able to appeal a negative decision within 15 days (compared with one month currently). With regard to immigrants entering the country illegally, the government has abandoned plans to deport such individuals to the country where they first entered the EU. However, it plans to go ahead with other controversial measures, such as doubling the amount of time (to 90 days) that an individual suspected of having entered the country illegally may spend in immigration detention. Finally, the government plans to step up efforts to attract high-skilled immigrants. The criteria to obtain a "passeport talent", a programme that streamlines procedures for individuals with desirable skills, will be broadened, partly in the hope of attracting such people after the UK leaves the EU.

We believe that the government will manage to pass most of these reforms swiftly, taking advantage of its first year in power to proceed with the most controversial changes. Political opposition appears more fragmented than ever, with the left lacking leadership and right-wing politicians split over whether they should back Mr Macron, stick to their traditional party lines or try to attract far-right voters. By reforming the labour market and the fiscal system, Mr Macron aims to strengthen his economic credibility within the euro zone, a necessary pre-condition for Germany to seriously consider his ambitious European reform proposals, which he will probably try to press for in the second half of his presidential term.

Data provided by: