Public finance management: the double danger

Posted December 31, 2021



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By Arnaud Pineau-Valencienne.
An article by IREF Europe.

In four decades, the country’s public deficit has soared. Its origin dates back to the first alternation of the V Republic. France is dogmatically undergoing an upheaval in the management of its public finances. Our American and English partners will make us understand this during a sumptuous dinner in Versailles with their eloquent silence.

Demagogic promises flourish, “flat options movements” and the bill pays immediately

This political practice is not new. It is observed under the Fourth Republic with left-wing leaders. In December 1957 Jacques Rueff addressed the Prime Minister with this remark concerning the state of our finances:

“The deficit deprives France of any freedom of decision […] and reduces it to the status of a minor state dependent on international charity … “

On May 13, 1958, a rebellion took place in Algeria and paralyzed power. Everyone understands the insurrectionary nature of the movement, but no one knows how to predict the future. The great maneuvers are played in the shadows, General de Gaulle comes out of his reserve; although banned from speaking on the French antennas by Jules Moch, his press conference of May 19 does not air on the antennas and for good reason, but it triggers the initiative of President Coty proposing to the General a mandate as Prime Minister, with the full powers of the Assembly for institutional reform.

De Gaulle agrees without delay and starts the recovery of finances with an ambitious plan, known as the Pinay-Rueff plan, adopted at the end of December 1958. The general will have to twist the arm of the members of the government to win their support. It was the beginning of a new era of balanced budgets that the country would benefit from for nearly a quarter of a century. In 1981 Raymond Barre gave his socialist successor an almost balanced budget after two oil crises, a financial situation that today would be the envy of the most virtuous governments!

Demagogic promises flourish, “flattering option movements”, the bill is paid immediately: chain devaluations, growing unemployment, loss of competitiveness of our industries. At the same time, Milton Friedman proclaims it “freedom must precede equality to obtain more social justice, without having wanted it”, our leaders don’t hear the Nobel Prize.

France’s per capita income, which in 1981 exceeded that of the United States and Germany, is now 40% lower.

Taxes rise without restraint and the public deficit widens

To remain popular and for the first time the tax wants to be punitive, it affects only a fraction of the population contrary to the constitutional dogma which specifies that everyone must contribute according to their means.

The double penalty: more taxes and new taxes overlap, the deficit increases. As the tax kills taxes, France experiences overseas departures, resulting in outflows of money invested elsewhere, the number of major taxpayers in France is decreasing to the benefit of host countries.

All this is explained by the environmental mood, President Mitterrand’s trust in his predecessor is eloquent, “he says he wants to suppress the French bourgeoisie”. Surprising confidence that this, consisting in wanting to suppress a fraction of the population for what it is.

Thus deep antagonisms arise in the country, which persist today with an unfair and selective taxation. Simple minds see in it the solution to all our problems, without wanting to look at what is happening around us and what works. Nobody remembers this fact: the Swiss franc was worth around one French franc in 1969, today it is worth around one euro. The French saver has seen his savings divided by more than six, while it is unchanged for the Swiss resident. Whose fault is it ? The French who have maintained the purchasing power of their savings will also have to pay the capital gains tax, another double penalty.

Successive presidents do not tackle problem solving, after multiple promises of reforms, because they fear the voter. The countries around us are setting the example of better distributed and more moderate taxation.

During his tenure in business, the right has opted for a “rad-soc” policy, forgetting that the improvement of everyone’s conditions, everyone’s wealth, derives from the creativity of entrepreneurs, from the resources they dedicate to it and from the risks that they assume.

In 1974, a memorable article by Rueff explains how to redistribute the wealth created. He fights “The Cambridge Magician’s Pharmacopoeia” which generates an inflationary spiral. Far from the perverse practices of certain ministers who “unlock money that doesn’t exist …”source of inflation par excellence.

Who will have the wisdom and the courage to follow Jacques Rueff when he says:

“We must make sure that France wants her salvation, that she tells her the means to obtain it and the reasons for wanting it. “

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