Saturday, July 07, 2012
Francois Hollande's great experiment
All supply side economists owe Francois Hollande a debt of gratitude because he is about to conduct a great experiment in the effects of tax policy on an economy.
Fiscal consolidation has taken centre stage in France and, in the short-term at least, it will be tax-led.
While the spending restraint announced by Mr Ayrault [France's PM] this morning is by no means negligible - annual rises in public expenditure will be capped at 0.8% for the next five years - the government will focus its efforts on revenue-raising measures to meet its budget deficit target of 3% of GDP in 2013.
While this won't be old-style tax-and-spend socialism, it will be a tax-based retrenchment.
The message that Mr Hollande seems to want to convey is that if he's forced to undertake deeper austerity measures, then it will be mainly through soak-the-rich policies. France is committing itself to austerity with a strongly socialist flavour. There's a sharp break, politically and to a lesser extent economically, with Mr Sarkozy's more business-friendly fiscal policies.
Now, that the Socialist politician has moved into the Élysée Palace an exodus of the wealthy is on the horizon. Geneva and Brussels are also profiting from the rush of tax refugees. But no other city is as successful at attracting wealthy immigrants as London, whether it's oligarchs from Russia, China's nouveau riche, oil princes from the Middle East -- or rich French fleeing Hollande.
Britain offers wealthy foreigners incentives that are practically unparalleled in Europe. For example, the state exempts foreign residents from having to pay tax on income generated outside Britain. For some, having a British residence can save them millions.
London Mayor Boris Johnson, who speaks perfect French, recently encouraged workers in France's financial sector to move to the City. "Bienvenue à Londres," he said in February. "This is the global capital of finance. It's on your doorstep."
Hollande, for his part, declared the banks to be his "enemy" during the election campaign. He hopes to collect up to €300 million with his wealth tax. But it's just a short journey from Paris to the tax haven on the other side of the English Channel -- on the Eurostar train service, it takes just two hours and 17 minutes. More than 300,000 French people are believed to already be living in London -- more than the population of Rennes, Reims or Avignon.