In 2012, President Hollande has not reduced state spending at all but raised taxes. For 2013 he proposed an ‘austerity’ budget that would cut the deficit by €30 billion, of which €10 billion would come from spending cuts and €20 billion would be generated in extra income through higher taxes on corporations and on high income earners. The top tax rate will rise from 41% to 45%, and those that earn more than €1 million a year will be subject to a new 75% marginal tax rate. With all these market-crippling measures France will still run a budget deficit and will have to borrow more from the bond market to fund its outsized state spending programs, which still account for 56% of registered GDP.
If you ask me, the market is not bearish enough on France. This version of socialism will not work, just as no other version of socialism has ever worked. But when it fails, it will be blamed on ‘austerity’ and the euro, not on socialism.
As usual, the international commentariat does not ‘get it’. Political analysts are profoundly uninterested in the difference between reducing spending and increasing taxes, it is all just ‘austerity’ to them, and, to make it worse, allegedly enforced by the Germans. The Daily Telegraph’s Ambrose Evans-Pritchard labels ‘austerity’ ‘1930s policies imposed by Germany’, which is of dubious historical and economic accuracy but suitable, I guess, to make a political point.
Most commentators are all too happy to cite the alleged negative effect of ‘austerity’ on GDP, ignoring that in a heavily state-run economy like France’s, official GDP says as little about the public’s material wellbeing as does a rallying equity market in an economy fuelled by unlimited QE. If the government spent money on hiring people to sweep the streets with toothbrushes this, too, would boost GDP and could thus be labelled economic progress.