Categories
Economical and financial crisis Economical policy

What a Misunderstanding of Economic Financing!

The Myth of Idle Bank Deposits

While much has been said about euro life insurance policies to re-establish their economic usefulness, the myth of “idle” bank deposits seems to persist. Yet bank deposits can in no way be described as “unproductive.”

As of mid-2025, total bank deposits amount to about €2.6 trillion. The total volume of loans granted by credit institutions to French residents stands at around €2.9 trillion — €1.4 trillion to businesses and €1.5 trillion to households.

An Economic Aberration

Deposits do not sleep! Banks are massively financing the French economy — precisely thanks to these bank deposits, whatever their form: checking accounts, term deposits, savings accounts, and so on.

And while large companies and mid-sized firms can access financial markets directly — though they still rely partly on bank financing — small and medium-sized enterprises, self-employed professionals, shopkeepers, artisans, and households can only obtain financing through banks. Bank deposits are therefore indispensable to the French economy and intensely productive.

To impose a 1% tax on sight deposits — which earn nothing for their holders but are essential to the economy — would be an economic and financial absurdity. Rational savers would seek to reduce their sight deposits as much as possible. Alternatively, they might shift their savings to interest-bearing bank products, driving up banks’ funding costs and, consequently, the cost of credit. Such a shift would weigh on economic growth.

Another predictable consequence would be a transfer of savings to non-bank instruments, forcing banks to reduce lending to the economy — again hampering growth and employment.

The Same Effect on Term Deposits

Currently, term deposits yield around 2% over 3–6 months, sometimes less. Their remuneration depends on the European Central Bank’s key interest rates. Taxing household deposits held by those subject to the “unproductive wealth tax” (i.e., those with total assets of at least €1 million) at 1% would wipe out at least half of that return — before income tax on savings is even applied.

Since these interest earnings are already taxed at the flat rate, the remaining net return after this double taxation would be negligible. The result would be an inevitable flight of funds.

Let’s Avoid Misunderstanding the Basics of Economic Financing

As in many aspects of economics, what matters most is balance — an effective balance between consumption and saving, so that investment can take place and generate healthy, sustainable growth.

Savings placed in banks, life insurance, equities, or bonds finance the investments of households (in housing) and businesses. Bank deposits and life insurance are therefore not only useful — they are essential to financing investment and growth.

The figures, as well as the simple description of economic and financial mechanisms, make this clear. Out of ignorance or excess zeal, let us not create damage for the French economy and for society as a whole.

Olivier Klein is a professor of economics at HEC and a bank C executive.

Categories
Economical policy

The thinking of social democracy must be profoundly renewed in France

“A State that interferes everywhere does not only weaken institutions; it also destroys the bonds of trust between citizens, for it interposes itself between them and makes them strangers to one another.”
La Crise de la culture – Hannah Arendt

The thought of social-democracy as it exists in France has run its course. It has contributed a great deal for decades. But its intellectual model has hardly evolved, even though at least four important trends have emerged. These have been ignored, not analysed, sometimes denied, or, even worse, followed without seeing the consequences. Let us cite them, in no particular order of priority. The question of public authority, of security and the migratory phenomenon with the rise of Islamist ideology, which brings into focus what constitutes a nation. The rise of fierce individualism, with the overvaluation of each person’s rights and the devaluation of duties. The obsession with equality, bringing a dangerous egalitarianism at the expense of the pursuit of equal opportunity and fairness. The development, finally, of an overgrown public sphere, whose entropy breeds inefficiency, discouragement, loss of confidence, and growing unease… We shall return to each of these points. The issue of the necessary climate transition is not here mentioned, as social-democracy—though with too many dogmas and an insufficiently scientific approach—has rather well integrated it into its core thinking. Social-democracy must thus renew its thinking, or risk becoming obsolete, by addressing certain territories so far too little explored within its own ranks. Let us attempt to lay a few modest foundations.

Market and State

The market is indispensable, for it generates economic dynamism, resource allocation, and a match between supply and demand that may be imperfect, but is irreplaceable. Nevertheless, the market cannot, by itself, be a sufficient mode of regulation; to be sustainably efficient and sufficiently stable, it needs law, rules, institutional authorities, regulatory bodies, and intermediary organizations capable of acting when the market gets out of order or develops a destabilizing dynamic. The public sphere is thus indispensable for regulating the market, the economy and, more generally, society. The State (in the broad sense) is necessary for the harmonious balance of society, including by encouraging the existence of intermediary bodies, like trade unions, to regulate everything properly. The various forces of society are then channelled more or less harmoniously, in a balance, even if this balance is by nature changeable and unstable. And this model of regulation has, albeit unevenly and non-linearly, enabled an increase in well-being. And this, relatively well shared in European countries… Until now, the most accomplished expressions of this mode of societal regulation—combining ethics and efficiency—have appeared in Northern Europe and Germany. Then, with nuances, a form of social-democracy spread throughout Europe and became, willy-nilly, one of its defining features. Overall, social-democracy, in its variants, has for decades successfully combined the market and institutions and rules (including redistributive ones).
We will therefore use the term social-democracy in a broad sense, that is, beyond alternations between left and right governments, as the common foundation that broadly defines the way European countries regulate themselves.
Yet Europe seems today to be experiencing a relative decline, and even, for some years now, a significant economic lag, particularly compared to the American model. The multiplication of norms and regulations, less incentive to be enterprising or take risks, and a pursuit of equality—rather than equity—pushed without limit, appear to be some elements of explanation. Even its reformist currents, aware of this dangerous trajectory, have become insufficient… It is first and foremost essential to integrate into social-democratic thinking and public action the questions of public authority, security, and more effective management and integration of immigration. If not, failing to address these issues in a republican way will leave exclusive control of the narrative to populist movements, capable of attracting rightly discontented voters on sensitive everyday issues. These topics are crucial, and should not be treated moralistically or with contempt. In the same vein, to conceive of a country, a nation, as a multicultural kaleidoscope with no unity, no real borders, no shared culture, no identity, with only abstract universal values, is an ethereal vision, dissolving history, geography, and the Nation itself. It ignores the cultural bonds that allow a country’s people to recognize themselves and live together. To deny this is to provoke, sooner or later, the worst, willy-nilly. Renan already said it all: “What unites us is not a language, a religion, or a race, but a shared past and a common will to live together. A nation is a soul, a spiritual principle, based on the memory of past glories and the current consent to continue that shared life. A nation is a daily plebiscite.” Let this inspire reflection! Although fundamental, these topics are not specifically developed further here…
Next must be carefully analysed the diminishing efficiency of the public sphere. Just as the market is not immune to errors and endogenous dysfunctions, decisions by public authorities can be ineffective, even the wrong ones. Neither markets nor the State are omniscient. It is vital to recognise, beyond any ideology, that a public policy can indeed be ineffective. Worse, it can be inappropriate, even undesirable, with effects contrary to those sought. This must be central to the renewal of social-democratic thought. There is no “evil capital” and “good State”. No camp of evil and camp of good. This Manichean view is not only simplistic but dangerous and misleading. There is capital and its double (1), each with its own logic for endless development—return and capitalisation, on the one hand; control and power, on the other. Both, like all living organisms, feel the need to grow. Yet both are necessary and complementary, as long as neither totally imposes itself to such an extent as to destabilize the delicate balance permitting both to be effectively combined. That is what enables a society of progress…

The Logic of State Expansion: Over-Administration

We must therefore think freely to analyse the development, over decades in France, of an omnipresent State tending to intermediate everyone’s relations with each other and with society. This State exerts ever-closer control over individuals and develops an entropic, ever-heavier over-administration with diminishing returns… If the logic of State development and the public sphere must be thought through, this analysis is much more necessary in Europe and more particularly in France than in the US. Over-administration produces a feeling of helplessness, discouragement and nostalgia; it also encourages self-maximisation for some, or for others, a desire for rebellion or insubordination. With its own logic of unending growth, over-administration tries to respond to everything, infantilising people and constantly pushing for more State demand—which brings inevitable disappointment and, in turn, anguish, the insurmountable fear faced with the smallest problem, as individual responsibility is reduced and diminished. Too much State leads to atomisation of individuals and their alienation from their own ability to act. Over-administration and an overly intrusive State can indeed lead to a collapse of trust in oneself and between people, and hinder individual and collective action. They erode self-organized solidarity between members of society…

“Action is what allows people to appear before others, reveal their uniqueness and build a common world. When the State monopolizes this capacity, citizens are reduced to spectators.”
Hannah Arendt, The Human Condition.

In short, as Hannah Arendt insightfully argues, this dynamic induces a loss of the necessary balance between, on one side, freedom and individual or collective responsibility, and on the other, necessary regulation to organize a just society.
“The danger is not only the violence of authoritarian regimes, but the gradual drift towards a gentle and paternalistic administration that stifles freedom under the guise of protection.” she also writes.

The Essential Combination of Ethics and Efficiency
Faced with possible errors by the public sphere, and its tendency to expand until its effectiveness is significantly reduced and obstacles pile up for the energy of society, the State at large must regain vision and vigour to best accomplish its mission. It must avoid developing unnecessarily. And avoid issuing laws, rules, and creating various and sundry institutions not strictly required for the proper functioning of the economy or for society in general. The public sphere must, therefore, ensure the best possible combination of ethics and efficiency. Neither concept belongs exclusively to the market or the State. Their roles in this respect are much more complex and intertwined. Ethics and efficiency, two notions that must be united in companies as in society as a whole, since they are indispensable to each other in a dialectical tension. One cannot last without the other and vice versa. There is no sustainable ethics without efficiency, nor sustainable efficiency without ethics. And the two are not oppositional or dichotomous. Public authorities must permanently reflect on this dialectic…

Hyper-Democracy and Hyper-Social-Democracy

We should also question the natural tendency of democracy, and social-democracy, their endogenous dynamic. What I call hyper-democracy and hyper-social-democracy. These can create their own excesses. Tocqueville already warned of democracy’s internal logic. Without deep reflection on these trajectories, democracy and social-democracy can lead to their weakening, and even, ultimately, their possible demise. With, looming, the arrival of populism—left or right…
We cannot ignore excesses specific to democracy, produced by its own momentum: an ever-widening extension of rights, always pitted against the rights of others, and, symmetrically, the gradual abandonment of duties. This means individualism and egoism taken to the greatest extreme, and highly segmented, heightened communitarianism. Both are signs of complete self-enclosure. Alongside, as manifestation and justification, comes the idea that everyone is either oppressor or oppressed, with any questioning of the new dogmas forbidden. This leads, contrary to the claims of its proponents, to hate of others—those burdened with the fault of being the oppressor by pre-assigned status and inescapable guilt. The only possible forgiveness for the supposed oppressor is total re-education after confession and admission of fault. Fantasies and manipulation of history are rewritten through the simplistic oppressor-oppressed pair, everyone assigned to their original box. History, thus rewritten, is bent to this view. All resemblance to totalitarianism…? All this concealed behind words turned into totems, repeated endlessly. Words voided and emptied, but made mandatory, while others become forbidden and shameful. Morality police, thought police. Wokism is clearly the caricature and most accomplished expression today of this total distortion of the concept of democracy. It is not in any way an extension of democracy. It is not a continuation of progressivism. It is the new ideology of democracy’s excesses. An ideology, ultimately, that destroys the reality of democracy itself. To oppose wokism—understood as the intolerant and totalitarian radicalization of progressive activism—is neither conservatism nor reaction. Social-democratic thought should neither ignore nor abandon criticism and opposition to wokism to populism. Otherwise, it risks dissolving itself, and disappearing. The American example shows this well (the Democratic party defeated by Trump even in traditional strongholds, geographic and ethnic alike). In France, today’s Socialist Party gives a striking example, absorbed, unless it deliberately acts otherwise, by the NFP/LFI, mirrored by the rise of the RN…

We must also analyze the excesses of social-democracy itself. Social-democracy and democracy are obviously not totally distinct. Here we distinguish them formally, for they are not identical, and to facilitate analysis. Its excesses, developed from within, can be summed up as a search for absolute ultimate equality. Magical thinking that hides lack of depth. Absolute equality in all things, everyone with everyone, leads to universal jealousy, to sad passions. And also to condemnation of what drives the dynamism of society—effort and the quest for progress. There lies the root of progress itself. Tocqueville:
“There is no passion so fatal for man and society as this love of equality, which can degrade people and push them to prefer common mediocrity to individual excellence.”…

Social-democracy, without self-reflection and control of its own excesses, slides towards these fatal dynamics. The distinctions between “absolute” equality, equality of rights, equality of opportunity and fairness must all be reconsidered, along with their diverse moral, economic and social effects…
Thus, hyper-democracy and hyper-social-democracy bring about regressions and the risk of a gradual extinction of the inner drive of societies and economies, and so of well-being. They lead to financial failure, and thus social failure. But they also seriously undermine the capacity to live together and respect the necessary compromises between freedom and rules. They bring about moral failure, letting the lowest passions—jealousy, resentment, hatred—run loose. These are already at work…
There can be no renewal of social-democratic thought, nor lessened mistrust towards democracy, without a thorough analysis of the natural rise of the specific excesses of democracy and social-democracy, their hypertrophy, over-administration and its effects, as well as the legitimate republican need for a return of public authority and better regulation and integration of immigration. The general rise of populism, to be sure, has more causes than just these. But it would be dangerous to deny that here too lies part of its origin…

A Fake “Progressivism” Hides a Real Regression

Benevolent blindness to the causes and consequences of these four trends is not progressivism, even if it borrows its virtues. Quite the contrary. It confines, isolates, and causes fatal regression against values of both humanism and universalism—always values of progress, responsibility and emancipation, as well as harmony. These values may never have been fully realized, of course. But they did allow humanity in certain civilizations to recognize and respect minorities, and without harming the majority (a democratic principle otherwise outrageously and dangerously twisted). They led to equality between races, sexes, and social origins. They also helped facilitate equal opportunities rather than the assignment, from birth, of one’s status due to one’s parents’ caste, for instance. The combination of too much State with hyper-democracy and hyper-social-democracy produces this insidious and destructive malaise, only resolved by the boundless rise of rights and the collapse of duties and responsibilities. As with the loss of effectiveness of socio-economic regulation… And with it, a loss of societal trust, mistrust of institutions, of politics, of others, and ultimately, society itself.
And, in the end, a never-ending, unsustainable growth in public debt.
For a social market economy to endure, the assurance—especially for the poorest and those struck by adversity or circumstance—of essential protection by society, that is, for the most part, by the public sphere in a modern society, must be coupled in a balanced way with individual, family, and autonomous group responsibility. The welfare state, yes, but it cannot—it must not, on pain of entropy—seek to provide unlimited protection, with the result of making its members irresponsible to themselves and to others. Tocqueville again:
“The sovereign extends its arms over the whole of society; it covers its surface with a network of small, complicated, minute, and uniform rules, through which the most original minds and the boldest spirits cannot break to rise above the crowd; it does not break wills, but it softens them, bends, and guides them; it does not tyrannize, it hampers, represses, enervates, extinguishes, and reduces each nation to being nothing more than a flock of timid and hardworking animals, whose government is the shepherd.”…

Survival of the Social Market Economy Model

The right combination, the viable balance, is for now broken. This endangers the welfare state and thus the precious safety net. Criticism of administration is as old as time, of course. But this analysis questions the capacity of democracy, social-democracy, and, closely linked, the public sphere, not to succumb to entropy, to stabilize at a point of equilibrium marrying ethics (or justice) and efficiency (wealth production), and socio-economic well-being.
It is thus a question of survival for our European socio-economic model. With its specifically French flaws, making the system ever more inefficient, our model will soon be unable to reproduce—i.e. survive—unless a rebound comes in time, with the consequence, if not, of widespread impoverishment and both moral and financial ruin.
The reflection must continue. How can mechanisms be invented to limit these excesses? How can we recover the vital balances for our societies to survive and revive? That is the whole challenge. It is a fundamental question for our future, our “model”, our Europe, and our country.

Note 1:Marc Guillaume, PUF

Note 2: The atomization of individuals, as well as the loss of meaning concerning collectivity and society, is also caused by the rise of social networks, which in addition transmit both false and true information that distorts the relation to truth and increases individualism. Alongside the omnipresent State, this too boosts the rise of populism. But their roots differ and cannot be conflated.

Categories
Economical and financial crisis Economical policy

Excessive Public Debt Can Lead to a Breakdown of Trust in Society

The idea that the central bank can, by cancelling the public debt it holds, erase the problem, is a recurring temptation. Yet such a strategy is ineffective while also carrying serious dangers. On the budgetary front, the cancellation of debt held by the central bank brings no lasting benefit to the Treasury. Indeed, the Banque de France, owned by the State, returns its profits—including those derived from the interest paid by the State on the bonds it issues and the Bank purchases—back to the Treasury in the form of dividends. Cancelling the debt therefore amounts to cancelling both the interest burden and the corresponding dividend flow.

Debt monetization—that is, its purchase by the central bank—can temporarily resolve the painful increase in interest costs that markets could impose in the event of heightened concern over debt levels. However, this solution nonetheless entails fundamental dangers as soon as it becomes repeted and permanent.

Unlimited monetization or outright cancellation of all or part of the debt can profoundly disrupt the functioning of economic actors. In fact, they remove the monetary constraint: the need to repay debt or refinance it under “normal” conditions.

Yet confidence in money corresponds to a reliable and efficient system for settling debts. Money is indeed the instrument that discharges the debts arising from commercial exchanges. A loss of confidence in the proper settlement of debts thus leads to a loss of confidence in the outcome of exchanges, and in money in the very essence of its function. Money is therefore the fundamental bedrock of social cohesion in market economies, as Michel Aglietta has analyzed.

The loss of confidence in money, stemming from the abusive use of debt that ultimately requires monetization or cancellation, is not just a theoretical risk. Many economic episodes—from Weimar Germany to more recent cases in emerging economies like Argentina—illustrate the distrust, even flight from money, when it is no longer anchored in sound management of public finances and monetary policy. This flight may then shift, for example, toward locally created alternative currencies, gold, or today’s crypto-assets. The resulting social, economic, and political crises are dramatic. In France, the euro mitigates this risk, but other member countries could sooner or later refuse to share in such a danger.

An uncontrolled rise in debt is therefore not just a technical or budgetary issue: it opens the way to a fundamental challenge to confidence in money and to the stability of society itself. Easy solutions that rely on discretionary monetization or debt cancellation in disregard of common rules expose society to a systemic danger.

Olivier Klein
Professor of Economics at HEC

Categories
Conjoncture Economical and financial crisis Economical policy

Income Inequality: France Trapped by Treating Symptoms Rather than Root Causes

Published in L’Opinion, Tuesday, September 23

The response to income inequality cannot consist of endlessly fixing the symptoms through ever-greater redistribution. The real challenge for France is to address the root causes, starting with the excessively low employment rate.

The attention that should, with utmost seriousness, be devoted in France today to stabilizing our public debt ratio is temporarily diverted toward the issue of income equality and tax justice. Beyond the fact that even greater redistribution would only marginally address the debt problem in the short term—and could worsen it in the medium term for the reasons described below—it is important to carefully examine income inequality in France and to understand its dynamics, both before and after redistribution.

To this end, the Gini index is one of the key reference tools: the higher it is, the greater the income inequality; the lower it is, the more equal the distribution.

When comparing the following countries—the United States, the United Kingdom, Germany, Spain, Italy, Sweden, and France—before redistribution, France shows a Gini index of 0.49, higher than the average of the three most equal countries in the sample (0.453), and lower than the average of the three most unequal (0.517). Concretely, the gap between France and the most equal countries is +0.037, while the gap with the most unequal is –0.027. This places France among the countries where, before taxes and transfers, income disparities are relatively pronounced.

After redistribution, the picture is very different. The Gini index drops to 0.290, close to the average of the three most equal countries (0.270) and well below that of the three most unequal (0.353). The gap thus narrows significantly to +0.020 compared to the most equal countries, while widening sharply to –0.063 compared to the most unequal. This reflects the massive impact of France’s public transfers and redistributive system. After redistribution, France ranks among countries with relatively low income inequality.

Three key observations must be made to establish a relevant diagnosis for effective and fair action.

First observation: although France shows fairly strong income inequality before redistribution, it ends up among the less unequal countries after redistribution. Other measures of inequality confirm this result.

Second observation: the pre-redistribution situation is largely due to a relatively low employment rate. The Gini index includes the incomes of the unemployed and inactive. In France, a larger share of the working-age population than elsewhere is not employed—particularly among young people and those aged 60–65. This weighs on the measurement of initial inequality.

Third observation: redistribution—one of the strongest in the OECD—significantly corrects these gaps, ensuring necessary social cohesion. But at this level, our very high redistribution rate fuels a vicious circle. The lower the employment rate, the greater the pre-redistribution inequality. The more massive redistribution must be to correct it. But the more redistribution rises, the heavier the tax and social contribution burden becomes, weighing on business competitiveness and reducing work attractiveness. This mechanism, in turn, feeds a structurally low employment rate.

The response cannot therefore consist of endlessly repairing the symptoms through ever-greater redistribution. This cannot be a sustainable strategy. The real challenge for France is to address the root causes, starting with the excessively low employment rate. A significant increase in the activity rate, whether for young people or seniors, would radically change the situation. It would simultaneously reduce income inequality before redistribution, strengthen growth potential, and relieve public finances. According to very cautious estimates, raising the employment rate to Germany’s level (taking into account the lower productivity of new labor market entrants and differences in part-time work) could cut France’s primary public deficit in half.

Redistribution in France is therefore an essential instrument of solidarity. But it acts as a palliative, not as a preventive remedy. To avoid endlessly locking into the vicious circle of low employment – inequality – reinforced redistribution – further loss of business competitiveness and work attractiveness – low employment, the country must sustainably raise its employment rate. This is one of the key conditions for ensuring social cohesion in a sustainable way, with lower income inequality even before redistribution, preventing our GDP per capita from regularly lagging behind that of our neighbors, and giving our public finances a much better chance of consolidation. Misdiagnosing the issue by focusing solely on redistribution would inexorably damage both the economy and the social fabric.

Olivier Klein is Professor of Economics at HEC.

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Conjoncture Economical and financial crisis Economical policy

The French social and economic model is unsustainable

It would be more than reckless to claim that France does not have a serious public debt problem, nor that its social and administrative model does not require profound reforms to become sustainable. Admittedly, an immediate catastrophe on the markets is unlikely to arise solely from France’s financial situation, notably thanks to the protection offered by the euro. However, a lasting political chaos with no foreseeable solution could eventually trigger such a crisis.
In any case, the issue is to act deeply and swiftly to restore the sustainability of our economic and social model, which is now out of breath. Notably, the sharp rise in public debt interest payments, especially from 2026 onwards, will further weigh down the budgetary equation.

France’s Economic Disconnect

Our GDP per capita is increasingly lagging behind that of its neighbors. In 2024, Germany reached 116.2% of France’s GDP per capita, up from 105% in 2000; the Netherlands hit 136.4% versus 114; Denmark 129.3% versus 117.8; and Sweden 114.1% versus 100, for example. This serious disconnect, occurring over just two decades, reflects a decline in competitiveness and the exhaustion of the French productive model.
Meanwhile, since 2000, France’s public debt has risen from 59% to 113% of GDP—a 54-point increase. In comparison, the eurozone (excluding France) saw an increase of only 17 points, from 70% to 87% of GDP. This debt surge did not boost French growth, which has been slightly weaker over the period than in the rest of the eurozone.

116.2%

The tax burden in France reached 45.3% in 2024, compared to 40.3% for Germany, 40.6% for the eurozone (excluding France), and 34% on average in the OECD. Not to mention the growing overadministration and overregulation, which weigh heavily on our competitiveness and entrepreneurial spirit. Our employment rate (68%) is comparatively too low, while Northern European countries and Germany are between 75 and over 80%. The employment rate is strongly correlated with the level of social contributions paid by companies and with retirement rules. Meanwhile, the share of French merchandise exports in total eurozone exports has fallen from 16% to 11%, marking a significant decline in our industrial competitiveness.

It should also be noted that the redistribution rate in France is among the highest in the world. According to calculations by INSEE, the income gap between the top 10% and the bottom 10% drops from 18 to 3 after extended redistribution. The top 1% receive 7.2% of household income in France, compared to 8.7% in Sweden, 10.3% in Italy, and 14.4% in the United States.

Finally, public spending in France amounted to 57.1% of GDP in 2024, far ahead of Germany (49.5%), the eurozone (excluding France, 49.6%) and the OECD (42.6%). In the long term, there is no positive correlation across OECD countries between public spending and growth rates—quite the opposite beyond a certain threshold.

Work and Production Must Increase

Should we ignore these figures and, against all evidence, propose further increases in tax and public spending, instead of reducing them? Can we seriously fail to realize that the right answer for France is to increase the wealth produced, and not even more redistribution? That the issue also lies in the insufficient quantity of work, both annually and over a lifetime? Without understanding that this shortage only supports our standard of living and social protection at the cost of ever-increasing debt?
We must speak honestly and act justly to avoid the accelerated decline of our economic and social model. These observations are not ideological—they are neither right nor left. As Pierre Mendès France used to say: “Public accounts in disorder are the sign of nations in decline.”

Olivier Klein is Professor of Economics at HEC.

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Economical and financial crisis Economical policy

Bayrou’s Budget: Necessary, Whatever Happens

Published in Les Échos, August 28, 2025

It was urgent to put a stop to a dangerous drift that has been undermining our economic and social balance for far too long. The time for inaction is over, whatever the political outcomes in Parliament.
The budget must be part of a coherent, long-term strategy—no small feat in France today. It is essential to design a detailed and consistent plan for transforming the State and local authorities, making them leaner, less redundant, and more efficient. The engineering and support for change will also be crucial for the success of this transformation.

Responsibility

It is equally urgent to rethink our welfare state to make it sustainable. This requires greater accountability from everyone in regard to this fundamental common good: encouraging a more rational use of Social Security, avoiding overconsumption of healthcare or benefits, and introducing an individual contribution, however modest, to limit abuses without undermining solidarity. The amount of work in France—both the employment rate and the number of hours worked—must be structurally increased. If we had Germany’s employment rate, we would no longer face a primary public deficit or financing problems for our social protection system.

The current budget proposal touches on these issues. Public spending would continue to increase in 2026, but by 1.8% instead of the initially forecast 3.5% to 4%. This would be progress, but not the kind of cost-cutting seen in companies that need to reduce expenses. Criticisms of this budget proposal as “ultra-liberal” not only miss the urgency of the necessary recovery but are unfounded. Moreover, some of the supposed cuts are in fact hidden tax increases, such as the removal of the 10% tax allowance for retirees or the elimination of certain tax breaks.

Reform

The principle that “everyone must contribute to the effort” seems fair, but it must be applied with discernment. It is crucial to address excesses where they actually occur, not indiscriminately—otherwise the reform risks being unjust and undermining public support.

As for the idea that such efforts can only be accepted if accompanied by greater tax fairness, it must be placed in the French context. Our country is already one of the most redistributive in the OECD. In France, income inequality is reduced from a factor of 18 to 3 after redistribution. The top marginal tax rates are among the highest in Europe, while the lowest taxable incomes are among the least taxed. And 55% of French households do not pay income tax at all, while 10% pay 75% of the total.

More broadly, further increasing compulsory levies—already the highest in the OECD—would only further discourage investment, employment, and entrepreneurial risk-taking. The necessary balance requires fair pragmatism, reconciling social imperatives with economic solidity, without worsening the lack of work incentives or the insufficiency of competitiveness.

This budget proposal could therefore be a necessary—though insufficient—beginning, unless the confidence vote renders it meaningless. France will not escape, in any case, the imperative of a long-term vision that finally recognizes the country cannot live indefinitely on ever-rising debt and insufficient wealth creation. Let us have the courage to implement structural reforms before they are imposed on us. We must stop feeding the French vicious circle: ever-increasing taxes, uncontrolled spending—both already at world-record levels—resulting in a debt trajectory that is unsustainable and extremely perilous.

Olivier Klein is Professor of Economics at HEC.