The rise and fall of Macronomics

PARIS — When Emmanuel Macron came to power in 2017, he was hailed as the business-friendly former Rothschild banker who would turn France into a world-beating investment destination by slashing public spending and lowering taxes.

Seven years later, the French president’s economic credentials are in the dock.

Thursday’s eye-watering budget adjustment — €19.4 billion in tax increases and €41.3 billion in spending cuts — is a stark sign that France’s money management has veered off the rails on Macron’s watch.

The president’s political opponents are relishing his sudden fall from grace on fiscal helmsmanship — and are sharpening their knives.

Traditionally, Macron always sought to score political points by styling himself as the adult in the room on economic files. In this year’s parliamentary election campaign, he slammed both far-left firebrand Jean-Luc Mélenchon and far-right leader Marine Le Pen as irresponsible profligates who would topple France into the financial abyss. 

Now the president is getting a taste of his own medicine as opponents and allies alike — remember that potential successors are now seeking to show their mettle — attack his track record. France’s public deficit is expected to hit a jaw-dropping 6.1 percent of the country’s gross domestic product this year, compared with 2.6 percent in 2017.

“They have ruined France and lied to the French,” far-right leader Le Pen said last week, slamming “the financial incompetence of the ‘Mozart of finance’” a barbed reference to Macron’s earlier career as an investment banker at Rothschild.

Perhaps more strikingly, Édouard Philippe, who served as prime minister during Macron’s first term and is in the running to succeed him, also accused the outgoing government of hiding the truth from the public and from the EU on the massive level of France’s debt.  “Nobody believes it!” he said, referring to the promise to bring deficit in line with EU rules by 2027.

Economists and independent authorities such as France’s central bank and court of auditors are now also questioning Macron’s economic recipe, which was characterized by a mix of tax reductions for companies and wealthy individuals combined with generous subsidies to companies.

Clearing up the mess

The new government appointed after the defeat of Macron’s centrists in July’s snap legislative election and led by Prime Minister Michel Barnier is now facing a severe budget crisis.

Barnier is accusing his predecessors of failing to tell the the French the whole truth about the country’s parlous budget. He said he found “a very degraded situation, much more degraded than has been said.”

France’s deficit — the difference between how much the country spends and how much it receives in taxes — has taken a nosedive over the past few months and will be around 6 percent of the country’s GDP this year, well above the official forecast of the previous government of 5.1 percent and the 3 percent deficit limit fixed by EU rules. France is already facing a so-called excessive deficit procedure in Brussels for breaching EU spending rules last year.

Thursday’s big clawback in the budget includes a new tax on share buybacks, a tax on electricity production and a hike on corporate taxes, especially for large groups, and taxes on the wealthiest households, which partially reverse Macron’s past tax cuts.

Macron’s economic game plan seemed to pay dividends before the coronavirus pandemic. At the beginning of his first term, the government managed to keep France’s deficit below the EU mandated 3 percent of GDP limit in 2018 and France extricated itself from a previous EU excessive deficit procedure. At the same time, the country’s unemployment rate fell to 7.5 percent this year from 7.9 percent in 2017, and the country became Europe’s most attractive destination for foreign investors, according to an EY survey. 

Macron’s economic honeymoon ended when public spending skyrocketed to contend with the economic crisis triggered by the pandemic.

Like other EU countries, France made massive state interventions to keep its economy afloat, becoming Europe’s second biggest spender in subsidies to business after Germany.  During the energy crisis fuelled by Russia’s invasion of Ukraine, France and other EU countries kept spending to help impacted businesses and cap the prices of gas and electricity.

Hanging on too long

When the crisis eased, the government struggled to put its public finances back in order. It balked at the sort of major spending cuts or tax hikes that could have made Macron more unpopular in EU and national elections this summer. 

“The president feared a debate on the budget two months before the EU election,” said a former ministerial staffer, who was granted anonymity to speak candidly on the matter.

“The president got cold feet. He has been traumatized by the yellow vests,” said a former Macronist lawmaker, referring to the violent protests against Macron’s plans for higher taxes on fuel that erupted in 2018.

Over the past few months, in the corridors of France’s powerful economy ministry known as “Bercy,” officials warned that France’s deficit was spiraling out of control.

But in public, the ministry kept publishing overly optimistic deficit forecasts.

This spring, when the situation looked gloomy, then Economy Minister Bruno Le Maire proposed introducing a so-called corrective budget bill for 2024 to implement extra spending cuts and new taxes — an option publicly ruled out by Macron back then.

Macron and his Prime Minister Gabriel Attal opposed spending cuts and tax hikes as they feared a backlash ahead of last summer’s EU election, according to the same ministerial staffer.

The same reasoning applied after Macron called a surprise snap election, and the budget situation “progressively got out of hand,” the official added.

Until Thursday’s budget, raising taxes had been a taboo for a president who made his name by lowering them.

Macron made major tax cuts for businesses, bringing the corporate tax rate down from 33 percent to 25 percent of profits, lowering compulsory contributions that companies have to pay regardless of their profits, and ending a wealth tax. 

France’s court of auditors said those tax reductions were part of the problem.

“These tax reductions, which have not been compensated by spending cuts, have deepened the state’s deficit and increased its debt,” France’s court of auditors wrote in a report published this year, saying Macron’s tax reduction cost €62 billion between 2018 and 2023.

Macron’s rationale was that lower taxes on companies would increase economic activity and, in return, generate a bigger tax income in the state coffers.

“In principle, it wasn’t a bad strategy,” economist Jean-Pisany Ferry, the mastermind behind Macron’s economic program, said in a recent interview with Le Nouvel Obs. “But it didn’t work.”