French central bank urges tax stability, debt control to restore confidence

Governor of the Bank of France Francois Villeroy de Galhau speaks during a news conference at the G7 finance ministers and central bank governors meeting in Chantilly, near Paris, France, July 18, 2019. REUTERS/Pascal Rossignol

PARIS (Reuters) - French President Emmanuel Macron’s government needs to rebuild post-crisis confidence in the economy with spending restraint rather than new tax cuts while keeping public debt capped, the head of the central bank said on Thursday.

In an annual letter to the president, Governor Francois Villeroy said households were sitting on 100 billion euros (£89.63 billion)- 4% of GDP - of extra savings built up during a nearly two-month coronavirus lockdown when consumers could not spend in stores and restaurants.

But for the money to filter into the economy and help fuel a recovery, Villeroy said households needed visibility on taxes, which are among the highest in the world and are often tinkered with by successive governments.

“It could be a guarantee of fiscal stability over several years. France doesn’t have the means to finance new tax cuts,” Villeroy said.

Finance Minister Bruno Le Maire has said that a recovery plan due to be presented at the end of the summer should include a cut in a range of levies companies pay on top of usual corporate income tax, which they say are a major obstacle to international competitiveness.

With the coronavirus crisis expected to push French public debt this year to 120% of GDP from 100%, Villeroy said that keeping government spending stable was indispensable to bring the burden down to pre-outbreak levels.

“France’s status in Europe will hinge on our level of debt,” Villeroy said in the letter.

“Collective wisdom recommends therefore to not overshoot 120%. Otherwise, as our debt would rise faster than Germany’s investors, confidence would fall and France would ‘slip’ more towards southern Europe.”

Reporting by Leigh Thomas; Editing by Nick Macfie