France Economic Policy Roundup 31 July 2023

Macroeconomic outlook:

Inflation: Inflation continued to slow in July, to 4.3% year-on-year after reaching 4.5% in June and more than 6% at the start of the year. This deceleration can be explained by a smaller rise in food prices (+12.6% year-on-year compared with +13.7% in June) and a sharper fall in energy prices than in June (-3.8% after -3%). Food prices slowed for the fourth consecutive month, both for fresh produce (+10.4% year-on-year after +11.2%) and for other food products (+13% after +14.1%). Manufactured goods also rose less quickly than in June, thanks in particular to the summer sales. Their cost rose by 3.4% year-on-year, compared with 4.2% the previous month.

Economic activity: GDP rose by 0.5% in the second quarter, according to the provisional estimates. This figure is well above forecasts, with both INSEE and the Banque de France were expecting a modest 0.1% rise in GDP between April and June. The good results for the quarter are based on foreign trade, which made a positive contribution to growth of 0.7 points. Exports picked up and grew significantly faster than imports (+2.6% compared with +0.4%). The production of goods and services increased at a sustained rate (+0.8% after +0.4%). This acceleration can be explained in particular by the dynamism of the manufacturing industry (+1.1% after +0.8%), which benefited from the rebound in transport equipment and "other industrial products". The energy production also had growth (+4.1% after +4.0%), supported by the reopening of nuclear power stations.

Employment: In the second quarter, the number of jobseekers without any activity fell by 0.2% across the whole of France according to the Directorate for Research, Studies and Statistics (DARES), part of the Ministry of Employment. This drop could be partly explained by the implementation of the latest unemployment insurance reform from February 2023, which reduced the length of unemployment benefits by 25%, from 24 to 18 months when the labour market situation is considered favourable. However, young people under 25 and unemployed people aged 25-49 saw their numbers increase (+0.4% and +0.6%).

Government report identifies avenues for savings ahead of the 2024 budget, including potential treasury surpluses in State entities, while demonstrating that France spends more than other EU countries in nearly all areas

At a time when France's public debt recently topped the 3,000 billion euros mark, government departments and the General Inspectorate of Finance were commissioned to identify avenues for savings in twelve areas of public action. This first ever Annual Public Expenditure Review, published on July 24th, is expected to act as "a basis for reflection to enrich the work on budget programming", notes Le Figaro. The report confirms some of the already proposed upcoming measures that will be included in the 2024 budget, which will be finalised in September. Other proposed measures are intended to fuel debate when the deputies return from the summer recess.

The main finding of the report is a potential treasury surplus of €2.5 billion with hundreds of State operators identified such as Météo France, the national meteorological service, Pôle emploi, the government agency for unemployment, but also museums such as the Musée du Quai Branly, and research institutes, such as the CNRS. These entities are financed mainly by government subsidies or earmarked taxes, offering “pleasant room to manoeuvre” according to the report. Speaking to France Info, Minister for Economy, Bruno le Maire addressed the entities saying "You have been very lucky, you have earmarked taxes, so you have security of revenue, and what's more you have had the support of the recovery plan, so you have a very abundant cash position", However, "nothing justifies such abundant cash". In relation to this, the report also recommends to "adjust, in the short term and in certain cases, the State's direct and indirect funding of operators in order to reduce surpluses" in the upcoming budget, as reports Challenges.

Taxation linked to France’s green transition was also significant point of the report. The first recommendation is the gradual alignment, between 2024 and 2030, of the reduced excise tariffs on energy from which several economic sectors benefit on the normal diesel tariff", which the government is already planning to include this in the 2024 budget. The Minister for the Economy, Bruno Le Maire, has begun discussions with federations in the road transport, construction and agriculture sectors, believing that the strong reluctance of the industry can be overcome by spreading the reduction over six years, as reports Les Echos .The report however goes further, recommending a gradual alignment of the standard price for diesel and petrol, a sensitive issue, not expected to feature in the 2024 budget. The government has no plans at this stage to resume the convergence of diesel and petrol taxation, which was widely protested and interrupted by the "yellow vests" movement in 2018, as reports Challenges. The report also controversially suggests abolishing "the intermediate VAT rate of 10% on home improvement work other than energy renovation" and putting an end to "local tax exemptions that encourage the artificialisation of land".

The report also confirms the proposals already put forward by the government to reduce public spending on housing. The end of the Pinel scheme, an income tax reduction scheme for buy-to-let landlords, at the end of 2024 has already been agreed. Moreover, zero-rate loan scheme to help people buy their first home will extend beyond 2023 until 2027, but with refocused with a more limited scope. The Ministry of Economy has indicated that these two measures will ultimately represent savings of €2.3 billion.

The report also reveals that France spends as much or more than the other EU states in all but one area, as reports Les Echos. In 2021 France presented a total surplus of public spending equivalent to 7.5 points of GDP compared to the EU average, and is only on par with the EU average on public order and security spending. Social protection, excluding health spending, accounts for more than half of the public spending gap, due to pensions. Unsurprisingly, this is the biggest cost premium compared with other EU countries, and has been the major reform of the government this year raising the pension age from 62 to 64. It stands at 4.3 points of GDP and exceeds 5 points if health is included (1.1 points). Housing costs 0.7 GDP points more in France compared to the EU average, which helps explain why the government has chosen to make it one of the main areas for savings.

Green Industry Bill adopted to facilitate green re-industrialisation and transition, with further projects announced such as two alternative fuel plants in Le Havre

On July 22nd in their final vote before the summer recess, French deputies adopted the ambitious Green Industry Bill on first reading, which aims to re-industrialise the country while promoting the green transition, as reports Challenges. Minister of Economy Bruno Le Maire welcomed the "start of relocation" and the "decarbonisation" of industry, after "three decades of renunciation". The successive events of Covid-19 pandemic, followed by the war in Ukraine have put industry back in the spotlight and made the industrial renaissance a concern shared by the entire political spectrum on the economic dependence of France, particularly in terms of industry. As a result of this de-industrialisation, “France lost its comparative advantages in certain sectors due to a lack of investment in innovation and plant modernisation, undermining its ability to export”, notes Les Echos.

The aim of the bill is to encourage industrial projects in the "big five" - wind power, photovoltaics, heat pumps, batteries and low-carbon hydrogen. In particular, the bill will halve the average time taken to obtain authorisation to open a plant, currently estimated at 17 months. For projects of "major national interest" an exception procedure is planned. The government is also introducing new tools to attract private savings, rather than public money, to achieve the green transition, with a new measure called" future climate savings plan", a savings plan open to under-21s with which they hope to raise a billion euros for green industry. A label will also be created to give the ‘greenest’ companies preferential access to public contracts, a "Copernican revolution" according to Minister of Industry, Roland Lescure.

The State will now have to define a "national strategy" on green industry for 2023-2030, the outline of which will be vital if France is to reindustrialise in the long term. In an op-ed in Les Echos industrial policy researcher Anaïs Voy-Gillis says that France must explore deeper how it assesses the notion of dependence, but above all “reflect on the goals we are pursuing and the society we want to build through strengthening our industrial base.” She recalls that a balance needs to be struck between developing industry in or near major cities and in sparsely populated areas of France, and that this “industrial renaissance” must involve rebuilding local production systems and improving their attractiveness, particularly in environmental terms. On Linkedin, she further commented that to reindustrialise, “tax and financial measures will not be enough”, and that instead France must move away from ‘industry mobilising’ to ‘society mobilising’ to recreate a favourable ecosystem. Furthermore, she argued that rebuilding an industrial base in France cannot be done without considering the European framework and without a European industrial policy that encourages the pooling of resources to finance the technologies of tomorrow, in particular through the creation of a European sovereign wealth fund, in the context of global competition.

Additionally, major projects that embrace the spirit of Green Industry Bill were announced this week. France's leading commercial port, Haropa (a merger of ports of Le Havre, Rouen and Paris) based in Le Havre will be home to two future alternative fuels plant, Salamandre and KerEAUzen, as reports Ouest-France. “We want to take full advantage of this port complex to develop the green industry, from Le Havre to Paris", declared Prime Minister, Élisabeth Borne, visiting the site on July 25th, welcomed to Le Havre by Édouard Philippe, the city's mayor and former Prime Minister. These projects, which are the result of a partnership between Engie, Air France and CMA-CGM, represent an investment of almost €1.2 billion and will eventually employ 150 to 200 people. Salamandre aims to produce 11,000 tonnes a year of second-generation biomethane by 2027, a low-carbon renewable fuel obtained by heating dry waste to a very high temperature to transform it into gas that will be used for maritime transport. Meanwhile KerEAUzen aims to supply 70,000 tonnes a year of e-kerosene for aircraft by 2030, made from a combination of renewable, low-carbon hydrogen and recycled CO2, with "Part of this CO2, i.e. 60,000 tonnes, will be recovered from Salamandre's facilities", while the rest will be supplied by local manufacturers.

Sophie Carey

Embassy Paris