The level of social spending is subject to only marginal reforms since the objective is to curb its progression rather than to reverse the trend, which is probably not sustainable given the aging of the population.
The dynamics of production and income that permeate the entire economy and finance retirements result from the activity of the working population. A rapid increase in the retired population will unbalance the construction sector, requiring a rethink of how the social model operates.
The main degree of adjustment is therefore that of the financing structure.
This is where the social VAT comes in. It was mentioned by the President of the Republic, and recently by the Prime Minister.
The technique is simple. It involves reducing payroll taxes, particularly those for universal benefits (family benefits, for example), which apply to all French citizens, not just employees, and increasing the VAT rate to compensate for the shortfall.
This raises several questions.
To give you an idea, the family represents a little over 30 billion in revenue through current expenses. One VAT point on the 20% rate brings in 8 billion. Four VAT points would be needed to balance the transfer. This is not neutral. There are two dimensions to the income dynamic.
1 – Will the reductions in charges be offset by salary increases? In this case, the effect is neutral for employees, but negative for retirees for whom prices will increase more quickly.
2 – If companies maintain the reduction in costs to increase their margins, the purchasing power of employees is immediately penalized. In this case, the supply shock should encourage an increase in investment to ultimately boost productivity.
A second question concerns which employees will be affected. Employees close to the minimum wage already largely benefit from exemptions from contributions. Therefore, the benefits of a reduction in contributions will not benefit them, and the impact on employment will be reduced. It will benefit more qualified individuals who have higher salaries and a lower risk of unemployment. The overall effect on employment will therefore be asymmetrical.
The third observation is that social VAT is a form of devaluation since French products can become more competitive by adjusting prices on the domestic and export markets, while imports will pay the new VAT.
Within the framework of the Eurozone, this means giving ourselves room for adjustment at the expense of other partner countries. France would revert to its old habits of yesteryear.
The discussion on the social model must be opened by addressing the constraints linked to low productivity and the aging of the French population. Without this, a form of tinkering will continue and make the situation unsustainable.