In France, Prime Minister François Bayrou has lost the parliamentary confidence vote, triggering the resignation of the entire government, after only nine months in office. Once more, the country has plunged into political turmoil.
Government borrowing is becoming increasingly expensive for all key Eurozone economies. Germany’s 30-year yields are at the highest level since 2011, and also Italy, France, the Netherlands and Spain are feeling the heat. The situation is however particularly serious in France, where state spending has hit 58 percent of GDP, while the tax burden on workers is now at 47 percent, one of the highest levels in the OECD.
Despite this massive income for the French government, its budget deficit is predicted to hit 5.7 percent of GDP this year. Earlier this year, rating agency Standard & Poor’s decided to maintain France’s sovereign credit rating at AA-, while retaining a negative outlook, meaning France remains at risk of a future downgrade if the public finances do not improve.
Ever higher taxes
The French government has not ruled out a VAT increase to finance social spending. Ever higher taxes seem to be the preferred instrument of choice for France’s political class, despite the fact that the French tax burden is already among the highest in the industrial world.
A specific proposal that keeps on coming back is to scrap the so-called tonnage tax regime. This is an arrangement whereby the tax base is calculated using the net tonnage of the entire fleet of vessels used by a shipping company. Normal corporate income tax is then applied to this income. Because in this way, loss-making years are offset with profitable years, taxes due by shipping companies are relatively stable. The regime provides those companies the predictability they need to plan their investments and modernise their fleets, regardless of price fluctuations on world markets.
Under EU law, the tax regime is not considered to be a violation of the EU’s single market rules, under certain conditions. The arrangement also exists in other EU member states with big shipping companies, like Greece, Italy and Denmark. In early 2025, the European Commission authorised Italy to reintroduce the tonnage tax benefit for its fleet. The Italian government had argued in favour of this regime by highlighting several objectives: encouraging the return of ships flying the European flag, strengthening the competitiveness of the Italian fleet, preserving jobs and skills, and promoting high standards of safety, the environment and social conditions.
Despite this, populist rhetoric has been employed against it, also in Denmark, which is the home of shipping giant Maersk. Ultimately, however, wiser heads prevailed, as the economic and strategic importance of the shipping company was realised, and also due to Danish pressure, shipping was excluded from the OECD’s global minimum tax regime.
Slaughtering the golden goose
Following Bayour’s failure, there is now strong pressure on President Emmanuel Macron to name a prime minister from the left, following the argument that the former two nominees, Michel Barnier and Bayrou, were from the right and centre, to respect the performance of leftwing parties in the 2024 election. This would increase the chances that higher taxes for competitive sectors, for example by scrapping the tonnage tax, would be adopted.
Like its European competitors, French shipping company CMA-CGM also benefits from the tonnage regime. French proponents of abolishing it have claimed that treating maritime companies like any other corporate taxpayers would allow the French state to recover an estimated €9.4 billion in tax income over just two years.
Tax lawyers associated with ReedSmith have pointed out it is doubtful to assume that the number of ship companies registered in France would not decline if the French government would decide to actually do this. In an analysis, they note:
“Would the flow of earnings being taxed in France through the tonnage tax mechanism today still be there tomorrow to be taxed at the general corporate tax rate? The answer is likely not. Most shipowners in the world have the freedom to choose the jurisdiction where their earnings will be taxed by choosing the vessel flag. Generally, earnings for a given vessel are taxed in the jurisdiction of that flag.”
Another new tax the French left wants to introduce is a wealth tax. Despite the fact that France’s “Solidarity tax on wealth” (ISF) was abolished after having contributed to an exodus of wealthy French citizens, and despite the fact that in other countries where such a tax was introduced, as for example Norway, similar dynamics could be witnessed, France’s leftists want to give it another go. Madness is doing the same thing over and over again and expecting different results.
Scrapping the tonnage tax would amount to an effective wealth tax for successful economic sectors. One does not need to be a genius to be able to predict what will happen to these, especially when they are so closely tied to global trade. The consequences for France would however be much more serious than the loss of a few super wealthy residents. An entire ecosystem of seafarers, shipyards, port services, logistics and maritime training depends on the favourable tonnage tax regime. Abolishing it may well jeopardise a sector that contributes positively to public finances.
Of course, other economic sectors should also benefit from lower and more predictable tax pressure. Then the solution should not be to increase taxes for competitive sectors but to lower the tax burden for those economic sectors that are less developed. Scrapping tax niches, which exist in many shapes or forms in every single EU member state, is a good idea, but it should be preceded by a lowering of the overall tax burden, not the other way around.
Spending cuts
France’s government spends more, as a percentage of gross domestic product, than any other developed economy, and over the last decade, it no longer manages to compensate this through productivity gains. What France should engage in now, instead of taxing more, is a series of public spending cuts.
From Ireland and New Zealand in the 1980s, to Poland in the 1990s and Argentina today, it has been demonstrated that there is only one sustainable solution to generate the economic growth needed to finance welfare spending: spending reform, tax simplification, and improving structural competitiveness through the elimination of excessive bureaucratic burdens. France has lots of low hanging fruit in that area. It should exploit this opportunity, instead of desperately trying to find the last competitive sector that has not been overtaxed yet.
At the end of August, Friedrich Merz, the Chancellor of Germany, Western Europe’s leading economy, warned that “the welfare state that we have today can no longer be financed with what we produce in the economy.” This should count as a warning to all European welfare states. He thereby called for a “fundamental reassessment” of the benefits system. According to the Wall Street Journal, he thereby expressed “the Unspeakable”, a “taboo in modern Western democracies: admitting that the size of the modern welfare state is no longer affordable.” Whether Merz will live up to his own words, is questionable, but in France, it looks like many are now keen to go in the opposite direction.
