France’s failed tax and spend experiment
When French President Francois Hollande visited Canada recently, one hopes the Gallic leader looked around. If he did, he would have noticed a stark difference in the economic opportunities between the two countries with the advantages mostly on this side of the Atlantic.
Dissimilarities between the two economies can be observed in a variety of ways—with jobs being most relevant to most people—but first, let’s start with post-recession economic growth in France and Canada.
France’s economy saw only a weak rebound after 2009 with real GDP growth rates of about two per cent in both 2010 and 2011 before slowing to a crawl with only 0.3 per cent growth in 2012. In comparison, Canada positively raced ahead, experiencing real GDP growth of 3.4, 3.0 and 1.9 per cent in 2010, 2011 and 2012 respectively.
When Hollande became France’s president in 2012, in spite of an already poorly performing French economy, he kept his election-time promise to raise taxes. New or higher levies were imposed on bank profits and corporations in general. Individuals were also subject to tax increases, including higher taxes on inheritances, dividends, bonuses, and stock options. The Value Added Tax (France’s version of the GST) was increased to 20 per cent; the top marginal tax rate was increased to 75 per cent from 48 per cent.
That last tax increase was temporarily derailed in 2012 by a French court on technical grounds but changes to its design allowed the government to proceed and it went into effect this year.
Before Hollande went to work increasing France’s interventionist, costly government, France was already heavily taxed. In 2009, taxes and other receipts to government amounted to 49.2 per cent of France’s GDP (compared to 39.1 per cent in Canada).
As of 2012, when Hollande began to raise taxes, taxes (and other revenues to government) in France already accounted for 52.8 per cent of GDP (compared with 38.1 per cent of GDP in Canada).
Pity the poor French taxpayer. By 2013, as the OECD has noted, the average French worker in France faced a tax burden on labour income of 48.9 per cent compared with the OECD average of 35.9 per cent.
Not surprisingly, given all the anti-entrepreneur taxation, on the one measurement relevant to day-to-day life for most people, jobs, France lags behind Canada.
Between 2009 and 2012 (the latest year of available French data), France added just 267,000 civilian jobs (excluding military employment). In Canada during the same period, 694,000 new jobs were created, or about two-and-half times the French number. This is particularly impressive since France’s population is almost twice Canada’s.
Clearly the French model is broken and more government spending and higher taxes won’t fix it. And the higher business taxes (in addition to other policies from labour to regulation) damaged France’s already weak competitiveness.
Perhaps Hollande listened to those who claim that more government intervention—more “stimulus,” a buzzword bandied about during and after the recession—and higher taxes will spur economic growth.
If so, Hollande and his advisers were mistaken and were forewarned.
Consider just one example from a large body of research; Harvard University professor and fiscal policy expert Alberto Alesina and his colleague Silvia Ardagna in 2009 reviewed stimulus initiatives in Canada and 20 other countries from 1970 to 2007.
In the 91 cases where governments tried to stimulate the economy, the unsuccessful attempts generally focused on increased government spending. Alesina and Ardagna found that government stimulus spending most often had the opposite effect of what was intended: it didn’t increase economic growth; it harmed it. “A one percentage point higher increase in the current [government] spending-to-GDP ratio is associated with a 0.75 percentage point lower growth,” concluded the Harvard professors.
To be sure, and in case anyone misinterprets this as an assertion that nations are only about dollars and cents (they’re not), there’s much to like about France—its art, architecture and culture. But jobs matter, and higher taxes and “stimulus” added to the French fiscal and economic train wreck with damage spreading outward to employment numbers.
Hollande expressed mild regret earlier this year, promising to eventually lower some taxes. But the damage was done, leaving scores of overtaxed, over-governed French workers—many without any job at all.
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