(Bloomberg) -- French President Emmanuel Macron endorsed a temporary tax on the country’s largest companies, supporting his new government’s strategy even as it departs from his longstanding pro-business stance.
The French government on Wednesday announced plans of around €60 billion ($66 billion) in spending cuts and tax hikes next year in an effort to rein in a widening budget deficit and bolster investor confidence in the country.
Just under €20 billion will be generated by boosting government revenues, with tax increases for wealthy individuals and large companies, as well as increased green taxation.
“Having an exceptional taxation on corporates is something which is well understood by large companies if this is for one year, given the level of effort which should be made,” Macron said on a panel discussion with Bloomberg’s Stephanie Flanders at the Berlin Global Dialogue. “But it should be limited, we have not to forget the reality of our economy, the reality of our competitiveness and our position.”
The endorsement from Macron is a stark contrast with the previous seven years of his presidency, when economic policy was governed by a pro-business mantra based around avoiding raising the tax burden.
But Macron is cornered. After snap elections he called in June, he no longer has a workable majority in parliament and the situation of France’s public finances has deteriorated significantly.
A massive fiscal adjustment is required to bring France’s budget shortfall to 5% of economic output from around 6.1% this year, government officials said in a briefing to journalists on Wednesday, speaking on condition of anonymity in line with internal rules.
Prime Minister Michel Barnier said he is resorting to tax increases because France’s debt challenge is pushing the country toward a precipice. The political instability and fiscal uncertainty have prompted investors to dump French assets and the risk premium on the government’s debt relative to German bunds is approaching its highest level since the euro-area crisis a decade ago.
Investors now seek an extra 79 basis points to buy French 10-year securities instead of German bunds — up from around 50 basis points before the vote, although the spread reached as much as 86 basis points during the political turmoil of the summer.
Paris is also by far the worst performing stock market in Europe this year with French equities broadly flat while Milan, Frankfurt, Madrid and London all boast double-digit jumps. The CAC 40 French blue chip index hit a record high in May but slumped and unperformed its peers after Macron called snap elections on June 9.
TotalEnergies SE Chief Executive Officer Patrick Pouyanne told investors in New York on Wednesday that the government wants “unfortunately to increase taxation in France rather than cutting spending, which I think is more expected by markets.”
He added that the move would have a limited impact on Total, which pays most of its taxes abroad.
Some French companies have indicated that they are resigned to the prospect of their tax bills increasing. But they have also said the state must first prioritize spending cuts.
“In a country that is the champion of tax, this is a prerequisite and necessary to gradually restore balance,” the Medef business lobby said in a statement Tuesday. “French people demand this, business demands this.”
While the president acknowledged tax increases may be necessary because of the situation, he said the top priority for France’s economy is still boosting employment among the youngest and oldest workers. He cautioned that it’s “super hard” to cut social spending and France has little room to maneuver on taxation as it already collects the most in Europe relative to the size of its economy.
“If we had the same level of activity as Germany, we don’t have public deficit,” he said. “It’s much smarter to work on that than being obsessed by a short term adjustment which is a killer for growth.”
--With assistance from Francois de Beaupuy.
(Updates with TotalEnergies comment in the 11th paragraph.)
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