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Progressive Futures

The reform agenda France needs

22nd May 2017

The new French President’s success in carrying through the reforms the country needs over the next five years could have consequences for at least a generation, if not more. Of course, more is at stake than simply France’s future: the European Union itself is also in the balance, with the ramifications reaching well beyond Europe’s borders.

Authors
Vincent Aussilloux
Author

Should Emmanuel Macron fail to take the country – and by extension Europe – in the right direction, the risk of a politician advocating extreme policies winning in 2022 would be greatly increased. And the European project as we know it would be in danger. Though success would lessen this eventuality, it would in no means be a guarantee against populists winning the next election. Perceptions rather than reality always prevail in people’s minds, and the French presidential system exacerbates this tendency. It will not be enough for Macron to improve reality; he will have to make France’s citizens feel more united in a fairer society and a fairer Europe.

A dicey predicament

It is because the French people’s demand for a fairer, more inclusive and prosperous society has been frustrated for so long that a little less than half of the voting population is tempted today to put its fate in the hands of populist parties. However, like in other countries, only a minority truly believe populist policies – i.e. political solutions based on the notion there is somehow a pure people in opposition to a corrupt elite – are the cure for France’s ills. Nevertheless, the trend does represent a rejection of the system, which people see as having failed to live up to the country’s core common values.

France’s current predicament only adds to the challenge. The country faces an unprecedented terrorist threat, plus security risks from failed states such as Syria and Libya; the European project has become highly uncertain; average income per head in France is forecast to return to the pre-crisis level only this year; and unemployment is still close to a record high. While half of the French population is doing well and remains relatively optimistic about the future, the other half is increasingly worse off and disenchanted. What’s more, technical progress is leading to profound economic and social changes that many see as a threat to their already fragile personal situations. Strained public resources only serve to make matters even direr.

Three major challenges

Looking ahead, there are three massive societal changes already underway and set to accelerate and intensify over the next 10 years: the energy transition, the digital revolution and the labour market upheaval.

The first is the most pressing, as the next decade represents the last chance to stabilise the climate to an increase in temperatures below 2° Celsius. For this to happen we will have to dramatically curb greenhouse gases: global emissions must be reduced by more than 30% beyond the Paris Agreement commitments, and developed countries need to reach net zero emissions around 2050. For France to achieve this it would have to implement a carbon tax of €150 per tonne by 2030 in most if not all sectors.[1] Massive investments of around 1% of GDP per annum would be required for the energy transition in housing, transport and agriculture, the three sectors of the French economy with the most emissions.

In terms of the ongoing digital revolution, artificial intelligence and big data will continue to disrupt sectors like manufacturing and transport and will soon affect other industries that have remained relatively sheltered, such as financial services, health and education. Despite the success of the French Tech initiative, too many mid-sized firms and SMEs in the French economy have not yet embraced the digital revolution. The next government will face the task of designing a framework to allow for and accompany disruptive innovations.[2]

But more importantly, France will have to draw on more of its abundant household savings (14.5% of total income per year) to finance its vibrant start-up scene.[3] The most successful ones will without a doubt have to be able to scale up on the global stage by finding more domestic sources of financing. Successfully pulling this off may well be the key to rejuvenating France’s industrial fabric and reviving productivity growth. It will certainly define in the next few years the country’s capacity to reinvent itself and remain in the club of the major global industrial powerhouses.

The third major transition is the one the labour market is undergoing. The predominant model of long-term full-time employment is already being challenged by the platform economy, shifting corporate boundaries and workers themselves aspiring to a different model. The speed and depth of change is still very much uncertain. But the number of people who currently combine different jobs or switch career paths over the course of a lifetime is enough for the French system of job protection and benefits to be adapted.

In addition, the increasing share of short-term contracts and the stubbornly high level of unemployment are two strong reasons for reform, in particular with regards to unemployment benefits and their financing. Working time regulations and negotiations on wage setting and working conditions need to combine more protection for workers in the face of economic and social change with more flexibility for companies.

In this respect, the move towards the Nordic model that France has undertaken slowly over the years must be greatly accelerated. It should go hand in hand with more collective bargaining at the company and professional branch level and a new status for employees, which would offer full social and unemployment protection regardless of the type of employment contract, the sector or the size of the company. The challenge is to reunify the labour market by closing the widening insider-outsider divide.

A more efficient national strategy for skills would also have to be designed and enforced for all workers. Despite recent reforms and significant amounts of public funds already invested, France’s job training system remains in need of an overhaul. The roles the national education system, higher education institutions, regions, social partners, companies and individuals play need urgent clarification. The national strategy for skills must focus first and foremost on better and continuous integration of all workers in the labour market, and at the same time it must foster mobility.

Fairer and more efficient taxation

Above and beyond the environment, the digital economy and the labour market, France must confront its growing fault lines.[4] Though the country’s income inequality has remained at relatively low levels compared to other advanced economies, wealth inequality has worsened rapidly over the last two decades due to the rise in housing prices – to the detriment of the younger generations. Half of the population concentrates 92% of household wealth, with 10% holding half of it. Moreover, the average wealth of those under 40 is now half what it was in the mid-1980s when compared to those aged 50 to 59.

The incoming government must take two courses of action to redress this situation. First, it must reform the housing market so more homes are built, and it must make it easier for young people, the unemployed and workers on short-term contracts to rent property. This will require bold moves to overcome the longstanding opposition of certain mayors to new buildings and new populations. It will also mean putting an end to France’s historical preference for overprotection of tenants in housing regulations, as this makes landlords wary of renting to the underprivileged.

Second, the government must reform inheritance tax policy.[5] Amounting to 20% of total household income each year, inherited wealth fuels intergenerational income inequalities as bequests are happening later and later in life. One solution is instead of determining the tax rate based on the amount inherited, the taxation rate could be based on all the inherited wealth an individual receives throughout the course of their lifetime. Moreover, to encourage grandparents to make gifts and bequests to their grandchildren, wealth received by relatively young heirs should be taxed at a lower rate than that received by older heirs. Such reform can help correcting for inequality of opportunity and prevent the emergence of a minority privileged class that inherits wealth at an advanced age.

These measures would only benefit individuals born to families with wealth to pass on. To redress this inequality, the country could develop an additional system of capital endowments at adulthood, which could be financed by inheritance taxes.

Such reforms could help correct for inequality of opportunity and prevent the emergence of a minority privileged class that inherits wealth at an advanced age.

Apart from inheritance tax policy, the government will have to live up to the challenge of reforming the tax system to reduce its complexity and shift taxes from capital and labour to focus more on consumption and environmentally negative externalities.[6] Importantly, the government must commit to a clear tax policy strategy, with target rates set long in advance to avoid adding to tax instability. By the same token, France must actively rebalance its public finances by reducing its deficit by 2 to 4% of GDP over the next ten years.[7] This is similar to what it has achieved over the past five years and will be necessary for France to markedly reduce its public debt in line with its European commitments.

Investing in the future

This should not prevent France from investing more in key areas where needed. But for that to happen, the country will have to make more and better choices with regards to its public investment strategy.[8] The challenge facing France is first and foremost that of selecting public investment projects that are likely to crowd-in private investment and improve productivity and potential growth in the long run, without operating costs increasing future deficits. This calls for investing in the future through the energy transition, digital infrastructure, venture capital financing, higher education and research. There is no reason for these investments to be financed by the public sector alone, but it can act as a catalyst where market return is too low or the level of risk too high for the private sector to finance these investments projects without public support.

There are two conceivable possibilities – that are not mutually exclusive and would likely be mutually reinforcing – to foster investment in the short run: France can act alone or it can spearhead a wider European-level public investment plan. Given France’s high level of public debt and its commitments under the Stability and Growth Pact, the first option would be achieved by changing the composition of public spending, improving the quality of investments and public guarantee mechanisms or strengthening the ongoing Future Investment Programme (PIA). A more ambitious European-wide investment package would be based on an additional budget within the framework of a new investment initiative or a dedicated European borrowing facility.

Together with innovation, education is one crucial area where additional investment is highly needed. To reach the level of the best performing countries, France must invest an additional 1.5 % of its GDP per year in education either through public or private financing. [9]  The education challenge is probably the most important one for the fate of the country.

Its OECD PISA (Programme for International Student Assessment) results have been seriously deteriorating in several areas for a number of years. For one, France is among the OECD countries where socioeconomic background has the greatest influence on a child’s performance. Moreover, French pedagogical methods have strong negative consequences on the well-being of pupils and their level of stress, with long-lasting consequences and a negative impact on the general well-being of the population.

Three absolutely crucial reforms to improve education in France are providing more autonomy for schools when recruiting teachers and deciding on teaching methods, instituting new pedagogical practices through more and better training for teachers and smoothing the transition between high school and higher education.

Last but not least, some of the most important reforms the incoming government will have to fight for concern the European Union. Above all, France and its fellow Eurozone countries are going to have to take a hard look at the Maastricht compromise and clarify the terms of the contract made between them if the common currency is to survive the next large economic crisis.

The views expressed in this essay are those of the author and do not necessarily represent the views of the department

 Image credit: Shutterstock.com/Frederic Legrand – COMEO

 


[1] Climate Action : Now or Never, France Stratégie, April 2016.

[2] Répondre à l’innovation disruptive, France Stratégie, January 2017.

[3] Mobiliser l’épargne pour le financement des startups, France Stratégie, January 2017.

[4] Bridging the Rifts in French Society, France Stratégie, November 2016.

[5] Is a France Where Privilege Trumps Merit Inevitable?, France Stratégie, March 2017.

[6] Quels principes pour une fiscalité simplifiée ? France Stratégie, August 2016.

[7] Dettes, déficit et dépenses publiques : quelles orientations ?, France Stratégie, July 2016.

[8] Improving Investment to Foster Growth, France Stratégie, February 2017.

[9] Quelles priorités éducatives ? France Stratégie, May 2016.

Authors