What is really behind the riots in Paris?
Nominally, the protests are about the rising cost of living, and in particular a further increase in the tax on diesel of 6.5 Euro cents, due to take effect on 1 January.
French taxes have never been higher, and they fuel government spending of around 56 per cent of GDP, virtually unchanged since 2009. This is the highest figure in the world.
How did they get there? Looking at trends over the last 40 years, we see that during each recession, government spending rose sharply, then fell back gradually, but never to the previous level before another recession came along and pushed it up again.
But where is it all going? The biggest item is welfare spending, which at 31.5% of GDP is again the highest in the world. The welfare budget follows the same curve as the total, reaching new heights with each new recession, then falling back only very slowly.
Of course France has an ageing population, and its pensions are unfunded, so it is stuck with a staggering 12 per cent of GDP annual bill for age pensions alone. So far, Macron has just dithered about this, talking about tiny adjustments, never about moving to a fully-funded system.
But there is another problem that may prove even more intractable, which is France’s penchant for subsidies. Here again, there seems to be a ratchet effect over the long run, with new subsidies being added without the old ones being retired.
The range of wasteful subsidies is staggering. Would you believe that American grad students, studying in English in Paris, are eligible for French rent subsidies? Or that Paris offers a 400 euro subsidy for buying an electric bike? Or that there are at least six different subsidy schemes for setting up businesses – though a guide to these warns that “Even if you’re eligible for a grant and it has been approved, you shouldn’t bank on receiving it, as it can take months or even years to materialise.”
There are housing subsidies galore: for first-time buyers, owner-occupiers, landlords, and tenants, plus a huge social housing programme which obliges practically every town in France to hold 25% of the housing stock in their area as public housing, even where there is no demand for it. The raft of housing incentives include tax breaks, zero-interest loans, subsidised loans, rent subsidies, and below-market public-housing rents.
Altogether, subsidies were estimated at 110 billion euros, or 5.2% of GDP, in 2013, having risen from 3.5% only six years earlier.
The short-term consequences of this largesse are continued budget deficits (France has not run a surplus since 1973) and waste of resources through uneconomic decisions that are made to look otherwise only by the subsidies.
The long-term consequences are more insidious. The population becomes inured to the idea of checking for subsidies before making any big purchase – a dwelling, a car, household items. The government gets used to picking winners and believing that its role is to shove the population this way and that according to the wisdom of the moment. Investment decisions are distorted because prices no longer reflect authentic supply and demand. Long-term capital investments are discouraged because there is no telling when the government will change tack, sometimes by 180 degrees, so that they are suddenly penalising diesel engines instead of promoting them, or cutting nuclear power instead of ramping it up, and so on.
Another neglected consequence of French subsidy-mania is the creation of a class of professional parasites making part or all of their living by bagging the difference between subsidised and market prices. One classic ruse, among hundreds, is to qualify for social housing, then sublet it on Airbnb.
Macron has so far made only baby steps towards solving the problem – slightly tightening eligibility or reducing benefits on a few of the more costly rorts. But the fact is that the country is so choked with obscure subsidies that scores of them could be abolished tomorrow with minimal squawks from voters, simply because they are largely unknown. The population has never demanded them, and don’t even know they exist until they go to buy something and are told by the sales agent about the free money schemes available.
Not only is Macron not fixing this problem, he is making it worse. His latest fuel tax hikes are only the revenue side of a huge programme of “ecological transition”, which he portrays as a sort of Hegelian historical inevitability.
The main burden of this “transition” is borne by yet another bewildering array of subsidies. There are subsidies for burning wood, or for gas hot water heaters, or for virtually any type of energy-related building cost, from insulation to heat pumps, from solar panels to stoves, and from new windows to chargers for electric cars. Wind power is still supported by half a dozen different handouts, including cash, tax breaks, subsidised loans, and energy purchase schemes. The annual budget for “ecological transition” has reached 34 billion euros, or 1.4 per cent of GDP.
Dimly, almost dumbly, the gilets jaunes perceive and resent this latest in a long line of state-sponsored schemes that steal from the lifters to subsidise the sly. They recognise in Macron and his followers the typically arrogant products of the elite schools of the French education system. Confronted by angry workers in the country for whom diesel is a major cost, his deputies ask why they don’t take advantage of the generous subsidies available for hybrid vehicles. Macron himself repeatedly displays his snobbery, recently referring to the “labouring classes”, and earlier characterising a group of meatworkers as “mostly illiterate”. He has described railway stations as places where the successful cross paths with “people who are nothing”.
Yet for all his arrogance Macron has a point when he describes the common people of France as “refractory”. After centuries of being treated like bullied children, it’s not at all clear that they are ready to stand on their own two feet, make their own decisions, and take their own risks, without endless backstopping and back-seat driving from the Nanny State. Nor do they necessarily understand that taxes can only fall if subsidies are scrapped. Until they face up to basic economic realities, the gilets jaunes are unlikely to find a leader who can finally take the fight to France’s smug establishment politicians, clear out the jungle of inefficient subsidies, and place the country on a path to prosperity.