View from City Road: The motive of the franc
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Your support makes all the difference.Edouard Balladur, the new Prime Minister of France, yesterday joined the club of Western politicians who have broken their election promises not to raise tax. Following the precedents of President Bill Clinton and Chancellor Norman Lamont, Mr Balladur has now introduced rises in the social security taxes he promised never to increase.
Mr Balladur's tax hikes bite now, unlike Mr Lamont's postponed pain. Even though the French Treasury predicts a decline in private sector output of 0.4 per cent this year - widely thought to be an underestimate - Mr Balladur has pushed through some Fr20bn of cuts in social security spending and another Fr25bn of increases in the solidarity tax. The net result will be to lop 0.5 per cent off consumer spending.
In addition, there is some small cut in the main government budget. With some offsets to help small businesses and the housing market, the net tax increase is probably less than half of 1 per cent of national output. That is not big, but there is certainly no delayed-action Keynesianism here.
The difference in French and British priorities reflects three factors. First, France has suffered a relatively mild recession thanks to rising competitiveness. (The impact of higher excise duties, pushing inflation up to 3 per cent, will not help here). Second, Mr Balladur wants to get the pain out of the way early, when he can still blame the departing Socialists. Third, the French authorities have been able to trim short-term interest rates down to German levels of 7.5 per cent, and can look forward to 6 per cent rates by the year-end.
There may also be another motive. The new government is determined to meet the Maastricht convergence criteria, including those for the budget. The message from Paris is that, having invested so much in linking the franc to the mark, the French are not giving up yet.
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