France is losing its footing. It just fell to the other side of the Laffer Curve : tax increases not only did not produce any revenue, but we’re witnessing a decline in fiscal revenue. Arthur Laffer, the american economist (born in 1940), became famous by having modelized this phenomenon : When taxes are already high, raising them some more leads to a decline in fiscal revenue because the economic agents, already over-taxed, are encouraged to work less (or work in the underground economy). A clear indication of this is that 30 billion euros in taxes voted by the Hollande government haven’t done anything, there are no traces of it to be seen! Though income tax is rising a little, sales (VAT) tax revenues are declining, as well as the taxes on gas and corporate tax. At the end of the day, fiscal revenues are less than what they were last year.
What’s worse is that the Ministry of finance cannot explain why this is happening because, according to its own calculations, the economy’s stagnation should produce the same fiscal revenues; but, for the first four months of 2013, revenues from the VAT tax fell 2.3% from the same period last year as the Minister is saying that consumption has stagnated. We would rather conclude that the economic models being used don’t make the grade and that the recession is stronger than anticipated. Consumption, the last engine in the French economy (largely fed by public debt), is slowing a lot more than what the official numbers are showing.
These numbers are worrisome. Let’s recall how, at the start of the debt crisis in Greece, everyone was making jokes about the Greeks’ inefficiency in fiscal matters and we’d hear stuff like ‘We wouldn’t see this in France!’ because, in fact the French have, or rather had, because it’s over now, a reputation of being able to levy taxes, which was a strong point with international investors.
Could we at least hope for this situation to provide an electric shock to the government and bring it to put structural reforms in place? Non, monsieur. The french political class is addicted to public spending, whether from the left or from the right. We could even get more tax increases!
The consequences of this mess are clear : France will not reach its public deficit target for the year. Even worse, the State’s budget will be less balanced than in 2012. The markets surely won’t like this, and France’s debt may lose its status of preferred investment that it still holds.
This may cause a brutal change for France because, so far, it was like a buffer between the northern countries, the « virtuous » ones, and the southern ones, more laxist. Up to now, this government-produced fiction, accepted by the markets, was putting France on the right side. But, with public accounts going massively haywire, as it seems to be happening, the credulous will come back to Earth. All of the Eurozone will be shaking then.
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Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.