The continued deterioration of public finances raises the question of financing the social model.

As a reminder, social spending represented 1% of GDP in 1938, 15% in 1960, 25% in 1990, and 33% in 2023 (source: Julien Damon on Télos). This spectacular increase reflects the evolution of the capacity to provide care, but also to address a large number of life situations. This inclusive model is a source of pride in the construction of French society.

However, its funding is a source of concern. Two aspects should be highlighted.

1 – The need for financing. This is commensurate with the burden of social spending and is sometimes perceived as a handicap for the competitiveness of the economy, but also for the sustainability of the economic and social model.

2 – The structure of the levies. Work has a very high contribution which raises questions about the contribution of other sources of income.

For a long time, these questions were not directly addressed. During the thirty glorious years, strong productivity gains allowed for a rapid increase in purchasing power while building a highly protective social model. Wages increased rapidly, more rapidly than other sources of income. This was the preferred source for this social model.

The slowdown in productivity gains has unbalanced the construction industry. To accommodate the development of the social model, the increase in tax rates has offset the slower increase in wages.

This method of financing was all the easier since labor is a relatively non-mobile production factor and therefore easily taxable, unlike capital, which can quickly move from one country to another.

The social model economy is thus associated with a very broad framework with a narrow source of funding. This raises two questions:

1- Incomes other than work have lower taxes. In a recent study with Antoine Foucher, U2P compared taxes on work, financial assets, retirement, and inheritance. For €100 of initial income paid by the company, the employee receives €54, the rest is deducted. For financial income, it’s €70, for the retiree €86, and for the heir €94. A rebalancing would make it possible to finance universal services through all income and not just through taxes on work. This question was recently raised regarding retiree taxes and the possibility of under-indexation.

2 – The aging of the population and the slow growth of productivity require that those who work be encouraged to do more. The income balance must shift towards those who produce and generate income. This income will fuel demand but will also finance the pay-as-you-go pension system because funding will take a long time to establish in any case.

To be continued