For the second year in a row, there will be no budget voted on before December 31. Presented to the Council of Ministers on Monday, December 22, the new special law – allowing the continuity of the State – passed the parliamentary stage without incident the next day. What happens next, however, is much more vague. At the beginning of January, the subject will come back in force, when deputies and senators will try again to find a compromise on a text. In the meantime, it is difficult for the French to project themselves into the future. However, uncertainty is a brake on economic activity. Companies tend to postpone their investments, while consumers postpone their purchases. A prospect which for the moment does not frighten the forecasters of the Banque de France, who have just increased their estimate of GDP growth in 2026 from 0.9% to 1%. A marginal oscillation which will not be enough to stem the drift in our public accounts.
Eric Mengus, professor of economics at HEC, does not want to wait for the budgetary debate to find a solution before taking action. “The role of economists is to propose solutions likely to unblock situations that are both economically and politically complex,” he explains. “Today, we must know how to look for innovative approaches to reduce debt and support growth.”
His idea? Announce a future increase in VAT to cause an electric shock. “This decision would encourage households to consume more immediately, which would trigger a temporary increase in activity, explains the expert. It is as if the ECB decided to reduce its key rate. In other words, it is a mechanism which makes it possible to act directly on private consumption and to influence its timing.”
The example of Germany
This economic policy tool may seem singular. While the French public debt has reached a new peak and the deficit is expected at 5.4% of GDP this year, an increase in VAT would rather be used – and justified – to restore public finances, as recommended by the Terra Nova institute in its latest report. In the past, several examples nevertheless demonstrate the effectiveness of such a measure in manipulating consumer behavior. This was particularly the case in Germany in November 2005, when the executive announced that an increase in VAT from 16 to 19% would take place on January 1, 2007. Consumption had peaked during this period of just over a year.
In an article published in 2021, economists Boryana Madzharova and Thiess Büttner studied 33 similar cases. “The reforms that we analyzed mainly concerned durable goods: cars, household appliances and even electronic products,” explains Boryana Madzharova. “These are major purchases, for which a difference in VAT, for example between 18% and 20%, has a real impact on the final price paid by the consumer.” However, the tool must be handled with care. “We must anticipate that once the device is completed, consumption will drop sharply,” continues the specialist.
Stay credible
For such a measure to work, the credibility of the government is essential. Before the pandemic, Italy had announced several successive VAT increases. But the health crisis, then the war in Ukraine and inflation disrupted the plans: the measures could never be implemented. “As a result, when the Italian government announces a future reform, households no longer believe in it and do not adjust their behavior,” says Boryana Madzharova. “The other critical point is timing,” adds Thiess Büttner. “We have to leave a certain amount of time for anticipations to take shape. We don’t know precisely how long. But if the period is too short, the mechanism risks not working.”
Could France resort to such a trick? During the health crisis, the idea emerged within the government, in order to create a consumer shock. It was abandoned in a context where it was still unclear how the pandemic would evolve and when exactly the recovery should be supported. For Lars P. Feld, director of the German research center Walter Eucken Institut, the current political uncertainty does not militate for moving from theory to practice today. “This turbulence affects investors and consumers, who are still wondering if the president will resign prematurely, who will be his successor…” The instigator of such a measure will have to find the right window.
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