By Leigh Thomas
PARIS (Reuters) – When Emmanuel Macron became French president two years ago he promised a clean break with the past. Within months of taking office he had cut tax on companies and investors and made hiring and firing easier via changes to labour laws.
Two years on, and after six months of ‘yellow vest’ street protests against his pro-business reform drive, the 41-year-old former investment banker is steering the economy with a new focus on households and boosting their incomes.
His juggling act – keeping his reform drive alive while making concessions to protesters – has boosted growth, economists say, while investment is firm and unemployment down.
Faced with the protesters’ accusations that he was ignoring workers and pensioners, and with the sometimes violent demonstrations causing weekly disruption in cities across France, Macron changed tack.
After a package of concessions in December worth more than 10 billion euros (8.6 billion pounds), Macron announced income tax cuts last month worth a further five billion euros.
To pay for it, he aims to delay tax cuts for some companies and close corporate tax loopholes. Spending cuts have also been promised, although no details have been given.
“Public policy is swinging back to supporting demand and households to the detriment of competitiveness because we don’t have any extra margin to do both at the same time,” said economist Emmanuel Jessua with think-tank Rexecode.
France’s international partners say that is a fair price to pay if it helps keep the peace and allows Macron to push ahead with further reforms.
“Overall France needs to consolidate because the deficit and debt are too high,” a senior IMF official said in Paris last week, adding: “There could be some flexibility to respond to social concerns and to find a renewed consensus to continue pushing the reform process forward.”
For a graphic on Measuring France under Macron, see – https://tmsnrt.rs/2D6GjBV
STRIKE A BALANCE
Macron’s concessions, made up mainly of tax breaks targeting low-income workers and pensioners, could push growth to 1.5% this year, the OFCE economics think-tank estimates. Without that public money, growth would be closer to 1%, OFCE economist Mathieu Plane said.
But the fiscal stimulus risks pushing the budget deficit further than planned over a 3% limit, which the government expects to temporarily overshoot this year due to a long-planned tax change.
By contrast Germany, ever hesitant to loosen the purse strings even as a slowdown in international trade weighs on its economy, is expecting growth of only half a percent this year.
“If Emmanuel Macron is able to get out of the domestic social crisis, there are some sources of growth,” Plane said.
“Mixing supply-side policy with measures focussed on boosting demand and purchasing power can help strike the right balance.”
As Macron begins the third year of his five-year term, he can claim his policy steps are beginning to bear fruit, though economists caution it will take years before their success or failure is fully clear.
The labour market is looking its perkiest in years, with unemployment at a near 10-year low and the employment rate at its highest since 1980. Youth unemployment has fallen sharply.
The percentage of new workers hired on permanent contracts, which employers avoided until Macron eased rules on firing, has risen to a record high of nearly 50 percent.
People are starting new businesses in record numbers and the business climate has changed enough in two years to make France a top destination for foreign investment, according to U.S. consulting firm ATKearney.
It ranked France fifth worldwide as a place for foreign investment, up two spots from last year despite the images of “yellow vest” street clashes and vandalism beamed around the world.
With major overhauls to the unemployment and pensions systems due this year, big foreign companies like staffing company ManpowerGroup, which has its biggest market in France, are convinced Macron will stick to his reform programme.
“Overall, the French government is intent on making France more competitive as a place to invest and as the place to grow. And I don’t see that changing,” ManpowerGroup CEO Jonas Prising said in a recent earnings call.
(Editing by Janet Lawrence)