France and a global minimum corporate tax

French Minister of Economy and Finance Bruno Le Maire expressed support on 6 April for US Secretary of the Treasury Janet Yellen's proposal to set a global minimum corporate tax, stating that an agreement on international taxation was "within reach". Le Maire had presented on 22 March a proposal to use part of France's corporate tax revenues to repay French government debt incurred as a result of the coronavirus disease 2019 (COVID-19) pandemic. According to the French economy and finance ministry estimates, the fiscal cost of the pandemic, combining extra spending and lost revenues, was around 7.5% of GDP in 2020, excluding loan guarantees (which accounted for a further 5% of GDP by the end of 2020).

The French government confirmed its pledge to avoid substantial tax increases; a corporate tax hike remains unlikely.

Le Maire highlighted that his proposal to use corporate tax revenues to redeem some of France's COVID-19 debt would not entail an increase in the corporate tax rate for businesses, as the government expected corporate tax revenues to increase during economic recovery once businesses recover from the COVID-19-related economic downturn. The government has reiterated its intention progressively to lower the corporate tax rate from 33% to 25% by 2022. This is aimed at supporting economic recovery after COVID-19-related restrictions are lifted, potentially during the second half of 2021. It also follows recent decisions by the UK and the US to increase their headline corporate tax rates to reduce post-pandemic fiscal deficits and debt stock. Le Maire also suggested that the increase in public debt resulting from the pandemic should be "ringfenced", an idea that is unlikely to gain traction within the European Union, while reiterating his opposition to canceling such debt.

The government is likely to introduce a mechanism setting multi-annual spending rules.

This was suggested in an 18 March report produced by Jean Arthuis, former economy and finance minister and current president of the Commission for the Future of Public Finances, which was requested by Le Maire. A draft bill overhauling the law on the management of public finances drafted by members of parliament (MPs) Éric Woerth (Les Républicains: LR) and Laurent Saint-Martin (La République En Marche: LREM), which is due to be presented in parliament shortly, will provide further guidance on the Macron administration's likely actions to curb French public debt.

Public debt is expected to remain elevated over the five-year horizon.

Although IHS Markit expects France's economy to rebound by about 5% in 2021, the country's public finances will continue to be under pressure from measures designed to support businesses and households, alongside extra spending on healthcare, including the vaccination program. The tightening of restrictions at a national level in place since 3 April - expected to remain in place for at least four weeks - will result in even higher fiscal outlays and deficits in 2021. As a result, the current official projections estimate that the public debt stock will increase further to 118% of GDP by the end of 2021. Despite record levels of public debt, low-interest rates mean that its servicing remains manageable: interest payments on public debt declined by 14.1% in 2020, despite the surging debt stock, reducing the urgency to introduce debt reduction measures. As a result, and given the upcoming election in April 2022, we do not expect discretionary fiscal tightening to materialize until 2023.

Posted 14 April 2021 by Bibianna Norek, Research Analyst, Europe & CIS, Country Risk, S&P Global Market Intelligence and

Diego Iscaro, Head of Europe and CIS Economics, Insights and Analysis, S&P Global Market Intelligence