Eric Monnet: “We must not turn tax increases into a taboo”

Posted on September 25, 2022 at 10:00 am

The Government has decided to put 45,000 million euros back on the table in its tariff shield. Is this the right strategy in the face of the inflationary situation we are experiencing?

We talk about price shields, but let’s call things by their name, these are price controls. But price control can be of great use when it comes to dealing with inflation that comes from abroad, as is the case in Europe, unlike in the United States, where generous budget policy could also play a role. It is very effective in the short term and we can see that it has limited inflation. But the perverse effects of a price control policy -which we had somewhat forgotten- are beginning to appear more clearly, namely, that it eliminates the price signal on the energy that we need for the climate transition and above all its very high cost and with a growing budget.

Do not believe in the hypothesis of a deficit of 5% of GDP next year?

In times of war and radical energy uncertainty, one cannot ask for very reliable budget forecasts. In this, what we are experiencing cannot be compared to the inflation of the 1970s, when there was no major armed conflict at the gates of Europe. Today, the strong geopolitical uncertainties that we are experiencing push rather a rising deficit. If at the beginning of 2023 factories are closed due to energy prices, should we not expect the tariff shield to be extended in one way or another to companies?

The question is to know how far the State can go to cushion the energy shock with the budget while strengthening public services in crisis and playing its role in preserving the environment.

After these “whatever the cost” multiples, do we need to worry about the level of our debt?

No one is able to say what the correct level of public debt is. What worries me less is the level of indebtedness than the financing circuits. If the shocks continue to happen and worry investors, we would have to be able to assume and organize a form of nationalization of the public debt.

What do you mean ?

Since the financial crisis of 2008 and even more so since the health crisis, the State has assumed the role of insurer of last resort and guarantor of all private activity. This has led to a continuous increase in spending. These must be financed. If it is not through taxes -the current government does not even want to hear about it-, then it will be necessary to consider directing the savings of households and companies towards State financing in case of distrust of investors.

A bit like what is happening in Japan, where the debt that exceeds 200% of GDP is almost 90% owned by the Japanese themselves. This would be a logical counterpart to the fact that the State insures the whole of society against successive shocks.

The State underestimates how the financial markets could react in the future if it is not able to present a clear plan to reduce its carbon emissions and its energy transition in ten years.

But isn’t the increase in the debt burden worrying?

In real terms, we are not seeing a worrying increase in debt service. Furthermore, only 10% of French debt is indexed to inflation. It’s nothing but today it’s bearable.

Beyond that, does rejecting tax increases, as the Executive proclaims, seem sustainable in the current budgetary context?

It seems complicated to me. If the government wants to abolish the CVAE, why not return to poorly targeted tax credits and, for example, recalibrate the research tax credit, which multiple evaluations have shown have huge windfall effects? The State ensures that companies continue their activity despite pandemics or energy crises. It is normal that in return we can clean up tax or subsidy systems that do not work, and not make tax increases taboo.

In his opinion, the State should further integrate the issue of climate sustainability in the budget.

In fact, France has not yet taken the turn of integrating the issue of climate goals into the state budget. There is the green budget, which distinguishes measures favorable to the environment, but does not guarantee the compatibility of public spending with carbon emission or pollution targets. However, this is going to be an important topic tomorrow.

The lack of a sufficient fight against climate change exposes us to new and important risks in the short term, including for the State budget. The State underestimates how the financial markets could react in the future if it is not able to present a clear plan to reduce its carbon emissions and its energy transition in ten years. It is also a legal issue since, as we have seen, the State can be sued for insufficiency in this area.

Do economic divergences between countries threaten the euro zone?

No, I don’t see any risk of explosion in the euro zone. On the other hand, having a single monetary policy at European level and uncoordinated budgetary policies runs the risk of re-creating tensions between the Member States. It is imperative to reflect on better coordination between monetary and budgetary policy at European level.

Should the European budget rules be reviewed?

Yes. The strict criteria that limited the deficit and public debt to a percentage of GDP are over. There is a consensus at European level that we must move to a system in which each country is asked for a trajectory of its public spending over time.

Is the rise in reference rates initiated by the European Central Bank (ECB) a good thing?

It is normal for the ECB to raise its reference rates in an inflationary environment. It is a question of credibility for a central bank. But the rise in tariffs must be consistent with the rate of inflation without energy and, for their part, the States must face the rise in energy prices through their budgetary, environmental and energy policies. However, for now, real rates remain negative. Not a substantial shock.

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