France and the 20th Theorem of Government

While writing about Colombia’s fiscal problems 10 days ago, I issued my 20th Theorem of Government.

Simply stated, governments get in trouble because politicians spend too much money. To be more specific, they don’t follow my Golden Rule.

And that’s exactly what happened in Colombia.

In theory, there might be exceptions, but I’m not aware of any country that has ever faced a fiscal crisis when it followed a policy of spending restraint.

But then I read about France’s budgetary problems and I wondered if I found that theoretical exception.

Here are some excerpts from a report in the New York Times by Liz Alderman. From her report, it sounds like France is in a fiscal ditch because of big tax cuts.

Faced with a rapid deterioration in the nation’s finances, Mr. Macron’s recently appointed prime minister, Michel Barnier, is opening the door to higher taxes on businesses and the rich, in a last-ditch bid to plug France’s widening budget deficit… Borrowing costs for France, which has Europe’s second-largest economy after Germany’s, soared Tuesday to their highest level since the 2008 financial crisis, as investors increased the premium they demand to hold French debt. …How did France reach this critical point? …Mr. Macron has made it a hallmark of his presidency to burnish France’s reputation as a place to do business. He cut taxes on companies and curbed a national wealth tax… Macron’s tax policies included lowering the official corporate tax rate to 25 percent from 33 percent, and reducing taxes for manufacturers and industry… And he introduced a flat tax of 30 percent on investment income. …A study by the Institute Montaigne, an independent French think tank, found that the combined measures cost the French Treasury nearly €15 billion in lost income. …Mr. Barnier needs to find an eye-popping €110 billion in savings over the next several years to bring France’s ballooning debt and deficit back in line with European Union rules. …Mr. Barnier has…not divulged specific tax increases. …Among the avenues being explored are increasing the flat tax to as much as 35 percent… Also under consideration is a temporary tax on “superprofits” earned by corporations… And some within Mr. Barnier’s camp have floated the idea of raising the corporate tax closer to where it was before Mr. Macron cut it.

Sounds like Macron has done some good things. And he has done some good things with regards to tax policy.

But notice that the article contains no analysis of what’s happened to the burden of government spending.

That made me suspicious, so I went to the IMF’s massive database so I could see what actually happened.

Lo and behold, we have further confirmation of the 20th Theorem of Government. Whether we’re looking at two decades of data or at what’s happened since Macron took power, we see that the spending burden has grown faster than the economy.

To be fair, the problem of excessive spending growth in France is not as bad as what I found in Colombia. And it’s trivial compared to what I found in Brazil.

But that doesn’t change the fact that France’s problem is too much spending, not inadequate tax revenue. Especially over the long run. As noted in the chart, government spending now consumes 57 percent of France’s economy, up from 53 percent of GDP just 20 years ago.

By the way, the tax burden increased from 49.4 percent of GDP to 52 percent of GDP over that same period, further confirming that France’s problem is on the spending side of the fiscal ledger.

I’ll close with good news and bad news.

The good news is that the tax increases (assuming they happen) will not be as bad as feared earlier this year.

The bad news is that France already has a terribly uncompetitive tax system, so any tax increases will make a very bad situation even worse.

Tax bottom line is that tax increases are self-destructive, even when pushed by supposedly right-of-center governments. Given the greed of French politicians, maybe it’s time for productive people to escape.