Macron caves in to pressure and makes many concessions

We are living in a world full of social crises, the most specific being the “yellow vest” protest in France, which is already taking effect. Surprisingly, this protest is affecting a country that had already established a high degree of redistribution. However, it is precisely this cross-section of the population affected by the redistribution – the lower middle-class – that seems to be protesting. The effects of having no viable opposition in France are being felt as well. The absence of real political opposition and the fact that even the unions are not involved in this social debate means that President Macron has no real negotiating partner. The channelling and willingness to communicate is therefore lacking, which creates a very difficult environment for the democratic process.

Macron made it easy for himself initially, by distributing money to try and take the wind out of the protesters’ sails. In his speech of 10 December, he of course appreciated the people’s opposition to his politics. He followed this conciliatory gesture by announcing a raft of measures to be implemented at the start of 2019, which are aimed at providing relief to private households. The measures were therefore aimed primarily at low earners and pensioners:

  • Pensioners will now pay social security tax on income of over EUR 2,000 (instead of the previous amount of EUR 1,200). This concerns the general social contribution CSG (Contribution Sociale Généralisée) in particular.
  • The minimum wage will be increased by EUR 100 per month. The state will pay the allowance as a social benefit so as not to impose a burden on the companies. This will increase the monthly minimum wage to almost EUR 1,600
  • Overtime will no longer be taxed as of next year.
  • The government will no longer tax Christmas bonuses or allowances offered by employers who are in a position to pay them.

Nonetheless, Macron has not thrown in the towel entirely on his reform agenda. He does not want to climb down on wealth tax, the abolition of which gained him the reputation of “president of the rich”. However, he made no comment on the other reform plans.

Macron also refrained from giving the total cost of the measures listed, which will burden the already strained state budget. The previously announced eco-tax on petrol and diesel has also been scrapped. The overall package is likely to total between EUR 7bn and 10bn, which equates to 0.3% to 0.4% of gross domestic product. The number of minimum wage earners alone totals around 1.6 million in France. Without the corresponding funding to cover the measures, the country is once again expected to breach the 3% public deficit relative to GDP. Planning was previously aiming for budget deficit of 2.8% of GDP for 2019.

The promised relief will raise the private households’ disposable income, which should boost private consumption somewhat and therefore economic growth as well. However, this positive effect will probably be less pronounced. The effects on growth are therefore expected to be positive but not excessive. Accelerated growth is at the expense of government debt. France is therefore ranked among those countries that want to speed up growth by simply increasing government debt thereby placating the discontent among certain sections of society. This does not constitute sustainable and intelligent economic policy.

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