Flash Economics. Can France afford its legitimate economic policy objectives? 06 April
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1 06 April 17-3 Can afford its legitimate economic policy objectives? It is entirely legitimate for to: Combat poverty, which may involve increasing basic benefit incomes (guaranteed minimum income; universal income for lowincome individuals); Try to reindustrialise by reducing corporate social contributions in order to lower labour costs; Want to reduce unemployment, which primarily affects the lowskilled, by lowering the cost of low-skilled labour (eliminating all social contributions on low wages, helping the low-skilled to find work, etc.). But these policies could cost around 7.5 percentage points of GDP per year. How could they be financed? The risk of increasing the fiscal deficit can hardly be taken. It would also be difficult to hike the household tax burden (including VAT), given past increases. Reducing public sector employment cannot be a rapid process. So the only remaining option is pension reform, with a fairly rapid increase in the retirement age. Patrick Artus Tel. (33 1) CORPORATE & INVESTMENT BANKING INVESTMENT SOLUTIONS & INSURANCE SPECIALIZED FINANCIAL SERVICES Distribution of this report in the United States. See important disclosures at the end of this report..
2 Three legitimate economic policy objectives in 1- Combatting poverty Table 1 shows the proportion of the population living below the poverty line in. Table 1: Share of population below the poverty line (living with less than 50% of median household income) Threshold: 50% of the median equivalent income Sources: OECD, Eurostat, Natixis Inset 1 recaps the basic benefit income system in. Inset: : Update on the basic active solidarity income (RSA) The active solidarity income benefit (revenu de solidarité active - RSA) has replaced the minimum income benefit (Revenu minimum d insertion - RMI) and the single-parent allowance (Allocation de parent isolé - API). It guarantees unemployed individuals an income level that varies according to household composition. It also supplements the incomes of individuals on low labour incomes. There are three types of RSA: Basic RSA alone (RSA socle): for those without labour incomes Basic in-work RSA (RSA socle et activité): for those on low labour incomes and whose total income is lower than a fixed amount Basic in-work RSA (RSA socle et activité): for those on low labour incomes and whose total income is higher than the fixed amount. Lump sum (in EUR, valid as of 1 st September 16 Number of children Single person Increase for single parent Couple ,5.00 1,3.6 Per additional child Conditions for entitlement: - At least 25 years old - Resident in - Means-tested - Under retirement age Change in the number of beneficiaries and spending on basic active solidarity income (RSA) benefits 2
3 Basic RSA 15 As of 30 September 16 Number of beneficiaries 1,52,00 1,16,00 1,44,000 Total spending (in EUR bn) Sources: CAF, DREES, Natixis Poverty could be reduced by increasing the basic benefit allocated to unemployed individuals, or by introducing a universal income paid to all individuals with incomes below a given threshold and also potentially paid to youth who are yet to find work (Table 2). Table 2 : number of unemployed youth aged 15 to 24 in 16 67,225 Breakdown of employees in wage brackets in multiples of the minimum wage (as %) Multiples of the minimum Percentage of employees wage 1.0 to to to to to to to to to to to to to and more 11.2 Source: Dares If, for example, 5,000 euros per year were paid out to unemployed youth, basic income recipients and wage earners on incomes below 1.3 times the minimum wage, the annual cost for French public finances would amount to EUR 57 billion. 3
4 2- Reindustrialising s deindustrialisation is clear to see (Chart 1A), and reindustrialising is a legitimate objective: reindustrialisation creates skilled, high-income jobs and averts the need to conduct restrictive policies to wipe out the external deficit (Chart 1B). Chart 1A : Employment and production capacity in the manufacturing sector Chart 1B : Trade balance (in EUR bn, annualised) Manufacturing employment (as % of total employment, LHS) Manufacturing production capacity* (02:1 = 0, RHS) (*) Manufacturing production/capacity utilisation rate in the manufacturing sector Sources: Datastream, INSEE, Natixis Total (goods and services) 40 Manufactured goods Sources: Datastream, INSEE, Natixis Since French industry has higher production costs than industry in countries with similar levels of product sophistication, like Spain (Chart 2), reindustrialisation may require a reduction in corporate social contributions, which are abnormally high in (Chart 3) Chart 2 Level of unit labour cost in the manufacturing sector* Germany Spain Italy (*) Payroll incl. social contributions/value added in volume terms 0.45 Sources: Datastream, Eurostat, Natixis Chart 3 Companies social contributions (as % of nominal GDP) Germany Spain Italy Euro zone excl. Sources: Datastream, Eurostat, Natixis For corporate social contributions in to be aligned with their level in the other euro-zone countries, they would need to be reduced by 4 percentage points of GDP. 4
5 3- Reducing unemployment Unemployment in primarily affects the low-skilled (Table 3). It is also well known that low-skilled employment is highly sensitive to low-skilled labour costs. Table 3: : Unemployment rate by level of education of the population aged 25 to 64 (as %) Year Less than upper secondary education Upper secondary education Higher education Sources: Education at a Glance OECD, Eurostat, Natixis 5
6 To reduce unemployment, low-skilled labour costs should therefore be reduced by eliminating all remaining social contributions on low wages (Table 4) and perhaps by providing assistance to get the low-skilled into work. Table 4: Employers' social contributions and labour costs at the minimum wage level in 16 - Companies with less than employees Base Rate In EUR Gross minimum wage Social security contributions 1, Sickness, maternity, disability, death 1, Contribution, solidarity, autonomy 1, Non-capped old age 1, Capped old age 1, Family allowance 1, Industrial accident (variable rate) 1, Unemployment insurance 1, Unemployment insurance (Tr A + Tr B) 1, Wage guarantee fund (AGS) 1, Pensions 1, Retirement for non-managers Arrco (Association for complementary pension schemes) 1, AGFF (Association for the management of the financing fund) for non-managers Arrco Tr1 1, Other taxes 1, Healthcare costs (lump-sum).5 Union contributions 1, Housing (FNAL< capped) 1, Participation in vocational training 1, Apprenticeship tax 1, Total contributions and taxes before deductions Fillon deductions Total contributions to pay 1, Total wage + contributions after deductions 1,661.3 CICE tax credit Total wage cost at the minimum wage after tax credit 1,573.3 Source: Natixis Assuming it targeted wages between the minimum wage and 1.5 times the minimum wage, and given the distribution of employment by wage bracket (Table 2 above), such a policy could cost 1.7 percentage points of GDP. How could these policies be financed? If wants at once to: - Increase low incomes to combat poverty; - Align corporate social contributions with their level in the other euro-zone countries to promote reindustrialisation; - At a minimum, eliminate all social contributions on low wages, the total (annual) cost for public finances could be around 7.5 percentage points of GDP. How could this be financed? 6
7 1- The fiscal deficit can hardly be increased, given that s fiscal solvency is still not ensured in 17 (Chart 4) Chart 4 : Fiscal deficit (as % of nominal GDP) Fiscal deficit (in positive terms) Fiscal deficit that would stabilise the public debt ratio* (*) Public debt (as % of nominal GDP) x nominal GDP (as % per year)/ Sources: Datastream, Natixis forecasts Given past increases in the household tax burden and its high level (Chart 5), it seems difficult to increase household taxes (including VAT) Chart 5 Household taxes* (as % of nominal GDP) Germany Spain Italy Euro zone excl. (*) Household social contributions + direct household taxes + other taxes + indirect taxes (VAT) Sources: Datastream, Eurostat, Natixis
8 3- Public sector employment and the civil service payroll are very high in (Charts 6A and B), but a reduction in public sector employment (by restructuring the government, achieving higher productivity gains, not replacing some retiring employees) is a slow process. Chart 6A General government employment (as % of total employment) Chart 6B General government payroll (as % of nominal GDP) 24 Euro zone excl. 24 Euro zone excl Sources: Datastream, OECD, Natixis 1 11 Sources: Datastream, AMECO, Natixis If an increase in the fiscal deficit, an increase in household taxes and a reduction in public employment cannot be used (or not rapidly), then the only remaining option would be a pension reform to raise the retirement age, which is low in relative to other OECD countries (Table 5). Table 5: Employment rate of 60 to 64-year olds (as %) United States United Kingdom Germany Spain Italy Sweden Japan Sources: OECD, Natixis The resulting reduction in public spending on pensions (Chart 7) could then be allocated to the policies described above. Chart 7 Government spending on pensions (as % of nominal GDP) Euro zone excl Sources: Datastream, OECD, Natixis
9 Conclusion: A contract with the public A French government could make a contract with the public to increase in the retirement age, in return for which the entire resulting reduction in public spending would be used to: - Increase low incomes; - Reduce corporate social contributions; - Eliminate employer social contributions on low wages.
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