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France urges Germany to follow its example with budget stimulus

France urges Germany to follow its example with budget stimulus
French Finance Minister Bruno Le Maire and Gerald Darmanin, French Minister of Public Action and Accounts attend a news conference on 2020 budget at the ministry in Paris, France, September 26, 2019. REUTERS/Philippe Wojazer -
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By Leigh Thomas

PARIS (Reuters) – France will cut taxes by more than 10 billion euros ($10.9 billion) next year and Germany should follow Paris’ footsteps with fiscal stimulus to revive its flagging economy, France’s finance minister said on Thursday.

Presenting France’s 2020 budget, Finance Minister Bruno Le Maire said the European Central Bank’s latest monetary easing steps created an opportunity for governments that can afford it to invest more.

The ECB cut interest rates to a new record low on Sept. 12 and launched plans to resume bond purchases to lower borrowing costs in the hope of sparking a recovery and boosting low inflation.

“Low rates won’t restore prosperity in Europe, monetary policy is necessary but is not enough,” Le Maire told journalists.

“Germany needs to invest and to invest now, the sooner the better. Let’s not wait for the situation to get worse,” he added, the latest in a series of such calls on France’s eastern neighbour.

French policymakers are growing increasingly frustrated as their German counterparts waver over whether to launch a budget stimulus package to pull Europe’s biggest economy back from the brink of recession.

French tax cuts already this year worth more than 10 billion euros are proving to be fortuitous for French growth as the global economy loses momentum, hitting export-dependent Germany particularly hard.

Le Maire said that households would see their tax burden cut next year by 9.3 billion euros, including a 5 billion reduction in income tax, which Budget Minister Gerald Darmanin said would benefit 95% of households.

Meanwhile, companies would see their taxes reduced by nearly 1 billion, in the latest instalment of a gradual reduction of the corporate tax rate over five years to 25% from 33.3%.

Emmanuel Macron focused tax cuts early in his presidency on companies and investors as part of his reform drive, which he hoped would boost growth by unleashing a wave of investment and entrepreneurial activity.

However, it also earned him criticism as a president of the rich and helped to spark waves of anti-government demonstrations at the end of last year by yellow vest-clad protesters.

The protests, which saw some of the worst street violence in decades in a backlash against his reform push, forced Macron to refocus his tax policy on boosting households’ incomes.

Buoyed by the resultant tax cuts earlier this year and less exposed to international trade, France’s economy has so far held up much better than traditional European powerhouse Germany.

The French government has built its budget on the assumption Europe’s second biggest economy will slow only marginally next year to 1.3% from an estimated 1.4% this year.

The High Council for the Public Finance, an independent fiscal watchdog, said the forecasts stood up and judged the government’s projected 2020 public sector budget deficit of 2.2% of GDP to be “plausible”, according to a draft ruling obtained by Reuters.

Though that would be France’s smallest budget deficit since 2001, the watchdog had some reserves about the underlying improvement in the public finances after taking into account swings in the business cycle beyond the government’s control.

Le Maire acknowledged that the government was not reining in French public spending – the highest among rich countries, as fast as planned due to the tax cuts concessions to protesters.

“We had a major social crisis several months ago which makes us take people’s expectations into account. A budget is not a purely technical exercise, it’s also political,” Le Maire said.

To offset the revenue lost from the tax cuts, Darmanin said savings were expected from reforms of the jobless benefits system, the public broadcasting sector, housing subsidies and better tax collection.

However, the lion’s share would come from lower than expected interest rates, which Darmanin said were expected to save the government 6 billion euros next year.

France has in recent weeks borrowed at record low negative rates as the deteriorating global economic outlook drove bond yields lower internationally.

(Reporting by Leigh Thomas and Myriam Rivet; editing by Philippa Fletcher)

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