French Elections: Debt Promises, Left v. Right

Aware that French government bonds could come under attack if France’s high level of public debt isn’t tackled, French presidential front runners Nicolas Sarkozy and Francois Hollande both have pledged to balance the budget.

Both have also candidates also want to tax wealthy people as well as large companies more heavily, and both have taken a tough stance toward the banking sector.

French President Nicholas Sarkozy
Julien Hekimian | AFP | Getty Images
French President Nicholas Sarkozy

But how they plan to bring those changes about differs significantly.

With just a week to go until the first round of the French presidential elections, front runners Sarkozy and Hollande stepped up their campaign rhetoric at mass rallies on Sunday, with Sarkozy highlighting his experience in handling the financial crisis, while Hollande promised he would roll back some of the president’s main achievements.

The outcome of the election will have a direct bearing on how well France copes with its debt, and by extension could very well affect the future of the euro zone itself.

President Sarkozy wants to achieve a budget surplus of 0.5 percent of gross domestic product in 2017 after achieving balance in 2016, while his socialist opponent Hollande wants to eliminate the budget deficit by 2017.

“There is one major difference,” Dominique Barbet, senior economist at BNP Paribas told Squawk Box Europe'." “What level of expenditure and income you have at the end of the mandate.”

“Hollande is willing to increase some expenditures and increase taxes massively, while … the Sarkozy platform is more balanced, with some spending cuts and some tax hikes,” he said.

France’s budget deficit, forecast to reach 89.1 percent of GDP this year, is still stubbornly high. Sarkozy failed to get the debt-to-GDP ratio down to 60 percent as he had initially intended, but plans to press ahead with further budget cuts and increase the value-added tax in order to reduce the level of public debt. He has raised the retirement age in France from 60 to 62—a move Hollande has said he will reverse.

Hollande, meanwhile, plans to cut the salaries of the president and cabinet ministers by 30 percent and introduce a law which would impose a 75 percent tax on annual income above 1 million euros. He also plans to freeze fuel prices for three months and hire more people in the public sector. Critics argue he wants to spend his way out of a crisis, rather than impose much-needed austerity.

As anger mounts over the low rate of tax paid by large companies, both politicians agree such corporations should pay more taxes.

But while Sarkozy wants a minimum tax on profits of big publicly listed companies, Hollande wants to introduce a tax rate that is dependent on companies’ size.

Under Hollande’s proposal, very large companies would be charged a 35 percent tax rate, medium-sized firms would pay tax at 30 percent and small businesses at 15 percent.

Some observers fear that the lower tax rate for small companies may be used by rich individuals to try to evade the regular income tax.

Both candidates have also capitalized on voters’ displeasure with financial institutions, whose perceived greed they believe helped cause the current crisis.

And as consumers tighten their belts, protectionism beckons—again, in two different forms. Hollande has declared the world of finance his true enemy and wants to separate banks’ retail and “speculative” investment arms to protect consumers.

Meanwhile Sarkozy has accused the country’s biggest lenders of failing to lend to the real economy. His solution is a pledge to help small companies with state financing for research and development.

Both Hollande and Sarkozy have alarmed their free-trading European partners by pushing for more trade protectionism in an attempt to garner votes.

Sarkozy wants to support “made in France” by emulating the “Buy American Act,” which allows the U.S. government to favor U.S. products for government contracts.

Hollande has promised tax rebates and public support for companies investing in France, while saying he will force businesses that leave the country to refund any subsidies.

Analysts agree that cuts to France’s generous welfare system, combined with higher taxes, are necessary in order to bring the country’s spending under control.

But during election season, higher tax bills win few votes.

“The two main candidates have avoided the key issue of macroeconomic subjects. The only one who has invested a lot of his time in those issues is (centrist candidate) Monsieur Bayrou, who seems to be slipping every day in the polls,” Pierre-Yves Gauthier, founding partner at Alpha Value said.

“We know that austerity measures alone cannot be the solution,” Barbet added.