French VAT hike rumoured; could add 1% to French inflation

We’re hearing rumours that the new French government is about to announce a big rise in the VAT rate, perhaps by 5% (Germany hiked its VAT rate by 3% at the start of this year). This would add a full percent to French inflation. Short dated French inflation linked bonds have rallied relative to nominal bonds as a result. Apart from the impact on price inflation, higher consumption taxes will damage consumer spending. We have seen German retail sales growth turn negative so far this year – the French consumer has been slowly recovering since 2004 and tax hikes put this recovery at risk. We all remember the damage that a Japanese consumption tax hike did that their fragile economy a decade ago. It will be interesting to see just how robust the recent Eurozone strength really is, and also interesting to see how the French public and unions react to this, and other structural reforms from the new right wing government under Nicolas Sarkozy. Are we about to see economic reforms on the same scale as Thatcher’s in the 1980s? Talking of which, if you get the chance to see Andrew Marr’s History of Modern Britain on BBC Two, please watch it – it’s by far the best thing on telly (now The Apprentice has finished anyway). Tuesday’s episode focused on the Thatcher revolution, and the social upheaval that the UK went through – from the 3,000,000+ unemployment rates and industrial unrest at the start of the 80s through to our discovery of consumer credit and the yuppy a few years later. Do the French want to swap a large state and social cohesion, but low levels of growth and high unemployment for a more dynamic, Anglo-Saxon style economy, but one where "there is no such thing as society"? By the look of the election results the answer is "yes" – but as the UK showed, the transition period is exceptionally painful.

 

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