Reform Rather Than Higher Taxes: Finally Breaking France’s Vicious

Circle Olivier Klein

29 September 2026 – Les Essais – Telos Collection

As the state of France’s public finances deteriorates, one diagnosis appears increasingly dominant in the public debate. Restoring the public accounts, it is argued, would require a combination of higher compulsory levies and lower public expenditure. This position is now defended by both political leaders and economists.

Two arguments are put forward. The first is one of budgetary arithmetic. If revenues increase while expenditure declines, the deficit will be reduced more rapidly. The argument is correct… on a spreadsheet. It follows from an incontestable accounting identity.

The second argument is political. Increasing compulsory levies, particularly on higher-income households or the most profitable companies, as well as taxing “privileged” retirees, would supposedly make reforms more politically acceptable. By creating the impression that the burden of adjustment is being shared fairly, this strategy would facilitate spending cuts and preserve social cohesion.

I believe both arguments miss the point. They adopt a static perspective, as if public revenues were independent of economic growth; as if taxation had no effect on behaviour, investment, employment or innovation; as if, beyond a certain level, taxation did not undermine corporate competitiveness and the attractiveness of work; and as if today’s political choices had no bearing on tomorrow’s reforms.

An economy, however, is not an accounting identity; it is a dynamic system in which behaviour adapts to incentives. Democracy is also a dynamic system: the successes or failures of public policies gradually influence citizens’ trust, and therefore governments’ very capacity to implement subsequent reforms.

Above all, these arguments overlook an essential question: why should France continue today to pursue a strategy that, in various forms, it has followed for more than forty years, when that very strategy has brought us to our present situation ?

France presents a paradox that is unusual among major advanced economies. Compulsory levies amount to approximately 43.5% of GDP, one of the highest levels in the OECD. Public expenditure is close to 57% of GDP, the highest level among developed countries.

Yet deficits have become permanent, public debt is now approaching 120% of GDP, GDP per capita has progressively fallen behind the euro-area average, the employment rate remains significantly below that of Europe’s best-performing countries, while trust in political leaders and institutions is among the lowest in Western democracies.

If the accumulation of compulsory levies had been the solution, these imbalances should gradually have disappeared. Yet precisely the opposite has happened. For several decades, each fiscal difficulty has led either to higher compulsory levies or, when further increases became more difficult, to greater public debt.

Structural reforms have often been postponed because stopgap solutions—fundamentally unsustainable, but politically convenient—provided temporary relief. That respite never resolved the underlying imbalances. More often than not, it merely shifted them into the future, allowing them to worsen.

The thesis of this article is that France does not primarily suffer from insufficient public revenues. Rather, it is trapped in two mutually reinforcing vicious circles.

The first is economic: the continued expansion of public expenditure calls for ever-higher compulsory levies and, when further tax increases become increasingly difficult to accept, greater borrowing. This dynamic gradually weighs on growth, investment, competitiveness and employment, ultimately weakening the country’s very capacity to finance its social model.

The second is democratic: the accumulation of deficits, the relative deterioration in public-sector performance despite growing resources, and rising indebtedness fuel growing distrust of government and public institutions. This distrust makes reforms more difficult, which in turn perpetuates economic imbalances.

Breaking out of these vicious circles now requires restoring the fundamental balances that underpin long-term economic prosperity and democratic vitality: more effective public expenditure, a higher employment rate, ambitious structural reforms, and a refusal to substitute yet another increase in compulsory levies for the transformations that have become indispensable.

France’s Two Vicious Circles: When the Economy and Democracy Weaken

One Another

Why does France, despite compulsory levies among the highest in the developed world and public expenditure unmatched elsewhere in the OECD, continue to accumulate deficits and rising debt? Why does this exceptional mobilisation of public resources translate neither into stronger growth, nor into an employment rate comparable with that of Europe’s best-performing countries, nor into greater citizen satisfaction with public services?

These paradoxes are not independent of one another. They are part of a cumulative dynamic that is progressively trapping France in two mutually reinforcing vicious circles.

The first is economic. For several decades, the growth of public expenditure has been faster than that of national wealth. To finance this gap, France has had to increase both its ratio of compulsory levies and its public debt relative to GDP. As compulsory levies have risen, their effects on economic behaviour have become increasingly significant.

Labour costs, corporate profitability and competitiveness, incentives to work, and the employment rate have progressively been affected relative to those of comparable, more efficient countries. This is not to suggest that taxation alone explains France’s lower economic efficiency. But it would be negligent to assume that taxation has become irrelevant when it reaches such high levels.

For several decades, France has suffered from an employment rate below that of Europe’s best-performing countries. This gap represents a major weakness, one that is often underestimated in the public debate. Every person who is not working despite being potentially able to do so simultaneously represents lost output, income, social-security contributions and tax revenues, while also increasing expenditure on social protection.

Conversely, increasing the employment rate generates a double dividend. It directly increases national wealth and therefore public revenues, while reducing certain expenditures associated with unemployment or inactivity. It thus improves public finances by broadening the productive base, rather than by increasing the burden imposed on those who are already working.

The gap with some of our European neighbours illustrates this potential for improvement. Countries that combine ambitious social protection with sound public finances are not necessarily those that impose the highest taxes; they are those that succeed in maintaining a larger proportion of their population in employment. Financing the social model depends less on the level of taxation imposed on a narrow tax base than on the capacity to broaden that base through higher employment.

Pension reform, labour-market reform, vocational training, support for jobseekers, and the integration of young and older workers should therefore be assessed against this criterion: their contribution to sustainably increasing the number of people in employment.

An insufficient employment rate and weaker corporate competitiveness undermine the very base on which compulsory levies are raised and also increase certain social expenditures. Deficits therefore persist, debt continues to rise, and the temptation returns to increase taxation further while avoiding deep reforms.

The circle thus closes: higher expenditure leads to higher taxation, which eventually weighs on wealth creation, thereby generating new deficits that, in turn, lead to further increases in taxation or borrowing.

It is equally essential to increase the value added generated by those who are employed—in other words, productivity gains. These are also crucial to growth, rising purchasing power and, consequently, public finances.

Here too, reforms are indispensable: to foster innovation and its diffusion; to facilitate economies of scale and therefore the rapid growth of companies; to improve the quality of education and investment in human capital; to avoid excessive regulation and over-administration; to reduce the penalties associated with failure while better rewarding success; to create more effective links between private and public research and development; and to increase labour-market flexibility so as to facilitate the movement of workers towards companies in emerging high-growth sectors.

Increasing productivity growth is therefore also essential. But it requires long-term reforms which, however indispensable it is to initiate them as quickly as possible, will themselves only produce their effects over the medium and long term. Raising the employment rate must therefore go hand in hand with efforts to achieve higher productivity gains. However, the former is easier to decide upon and bring about in the short to medium term. This is why we will focus more heavily on the employment rate, without in any way underestimating the parallel importance of productivity gains.

That said, the same underlying factors contribute both to an insufficient employment rate and to inadequate productivity growth. Excessive compulsory levies, both in absolute terms and relative to comparable countries, have a negative impact on both. The incentives to become an entrepreneur, to perform at the highest level, the profitability required to increase research and development expenditure, and the capacity to scale up rapidly are all affected by the level of taxation.

The vicious circle described here therefore encompasses both dimensions.

But this first circle does not explain everything. It gradually feeds into a second, deeper one.

The Democratic Vicious Circle

When citizens observe that taxation and public expenditure have reached record levels, yet deficits persist, debt continues to rise and the perceived effectiveness of many public services deteriorates, trust inevitably erodes.

Trust in governments, in institutions, in political parties, but also trust among citizens themselves.

International surveys show that this distrust is particularly pronounced in France today. It becomes not only a political problem but also an economic factor. A society that increasingly doubts its institutions, and in which distrust between social groups and between citizens themselves is becoming dangerously widespread, finds it harder to accept reforms, even when they are necessary.

Every proposal is immediately interpreted as a threat to a particular group, every reform is suspected of being unfair, and every trade-off becomes more contentious.

Political leaders are then driven towards solutions that are least costly electorally in the short term: postponing reforms, creating new schemes, preserving existing expenditure and financing imbalances through additional borrowing.

Debt, in turn, becomes a means of reconciling growing social demands without genuinely arbitrating between them. But it also merely shifts the difficulties onto future generations, without resolving the imbalances of the present.

The first vicious circle therefore feeds the second, while the second reinforces the first. It is the dynamics of these interactions that explain why France remains trapped on a trajectory from which it has been unable to escape.

This perspective leads to an essential conclusion. The French problem is not primarily one of insufficient public revenues. It is a problem of a set of balances that have gradually been disrupted: between expenditure and the wealth produced; between solidarity and responsibility; between rights and duties; between redistribution and wealth creation; between protection and incentives; and between short-term political considerations and long-term sustainability.

Until these balances are restored, each new increase in compulsory levies risks doing less to resolve imbalances than to prolong the very dynamic that produced them.

The real question is therefore not how to finance ever-greater public expenditure, but how to make such expenditure more effective, how to implement the structural reforms that have become indispensable, while restoring the necessary balance between rights and duties in order to ensure the long-term financing of our social model.

International Experience Confirms That Reform, Rather Than Higher

Taxes, Is the Answer

The diagnosis above could be challenged if it rested solely on an interpretation of the French case. If the diagnosis developed thus far is correct, however, one consequence should be observable in the evidence. Countries facing serious fiscal imbalances should achieve better outcomes when they reform their economies and improve the efficiency of public expenditure than when they seek primarily to restore their public finances through higher taxation.

And this is indeed broadly supported by research on fiscal consolidations and by the experience of many advanced economies that faced comparable imbalances before France did.

The question is straightforward: when a country needs to restore its public finances, is it more effective to raise taxes, or to control expenditure while implementing structural reforms that sustainably strengthen growth?

The economic literature provides a broadly consistent answer. The work of Alberto Alesina, Silvia Ardagna, Carlo Favero and Francesco Giavazzi has renewed the analysis of fiscal consolidation. Their contribution was to examine not isolated measures but comprehensive adjustment programmes, incorporating the expectations of households and firms.

Their conclusion is robust: adjustments relying primarily on expenditure restraint tend, on average, to entail smaller output losses than those based primarily on increases in compulsory levies. They are also more durable.

These findings are not isolated. Research by Guajardo, Leigh and Pescatori at the IMF, based on a different methodology, reaches a similar conclusion. The OECD, as well as the IMF in its economic-policy recommendations, likewise stresses that when fiscal consolidation becomes necessary, it should preferably rely on controlling current expenditure, improving its efficiency and implementing growth-enhancing structural reforms.

This should be done while preserving the investment expenditure that determines future prosperity: education, research, innovation, infrastructure and training.

Why this convergence? Because a credible reform programme changes the expectations of economic agents. When firms and households anticipate a lasting stabilisation of public finances without a further permanent increase in the tax burden, firms invest more, households regain confidence, and the economy gradually benefits from additional growth.

Conversely, when fiscal consolidation relies primarily on higher taxation, particularly in an already heavily taxed country, the effects on investment, employment, competitiveness and innovation tend to offset part of the expected budgetary gains.

National experiences illustrate these mechanisms in concrete terms.

Canada is probably the most emblematic example. In the mid-1990s, faced with increasingly worrying deficits, the federal government undertook a comprehensive review of public policies. Every expenditure item was assessed in terms of its usefulness and effectiveness. Administrative structures were simplified and operating expenditure reduced, while priority missions were preserved.

Within a few years, deficits disappeared, public debt embarked on a sustained decline and growth resumed. This consolidation did not result from a heavier tax burden; it was based on a transformation of public policy and a restoration of confidence.

Sweden followed a comparable trajectory after the severe crisis of the early 1990s. It profoundly reformed its pension system, making it automatically sustainable in the face of demographic ageing; introduced strict fiscal rules; modernised its administration; and implemented reforms designed to sustainably increase the employment rate.

Thirty years later, it combines one of Europe’s most generous systems of social protection with a high employment rate, a very moderate public-debt ratio and sound public finances. Its example demonstrates that there is no inherent contradiction between an ambitious welfare state and demanding fiscal discipline. The condition is that wealth creation should grow at the same pace as the solidarity it finances.

These experiences lead to an important conclusion for the French debate. The real choice is not between austerity and solidarity, nor between a strong state and a weak state. It is between two strategies for restoring public finances.

The first consists in seeking additional revenues in order to preserve existing structures as far as possible. The second consists in improving the efficiency of public expenditure and implementing reforms that sustainably raise potential growth.

Empirical research on international experience indicates that the latter strategy produces the most significant and durable results.

France has, however, an additional characteristic that makes this conclusion even more decisive. The countries examined in this literature generally did not enter their consolidation programmes with a level of compulsory levies comparable to France’s. When the tax burden is already among the highest in the developed world, the negative effects of further increases may be even greater.

This is why the current temptation to add new taxes to an already record-high level of taxation is less likely to accelerate the exit from the crisis than to prolong the very logic that produced our imbalances.

The lessons of the research converge here with those of the French experience: a vicious circle is not broken by postponing reforms through additional revenues, but by finally addressing its underlying causes.

Reforming the Public Sector: Improving the Efficiency of Public

Expenditure

If neither continued increases in taxation nor ever-rising public debt constitute a solution, the alternative cannot, however, be a policy of across-the-board cuts in public expenditure. The real challenge lies elsewhere: making public expenditure more effective.

The level of public expenditure is not, in itself, an indicator of success or failure. What matters is the service actually delivered to citizens, the growth it helps sustain and the quality of the public goods it finances.

From this perspective, France presents a troubling paradox. Never has public expenditure represented such a large share of national wealth, while French citizens’ satisfaction with many public services has progressively deteriorated.

This paradox reflects a phenomenon that may be described as entropy in public action. As administrative structures multiply, regulations accumulate, schemes overlap and procedures become increasingly complex, a growing share of resources is absorbed by the functioning of the system itself rather than by its purpose. As in any complex system, energy is progressively consumed by the organisation itself.

Education provides a first illustration. France devotes to its education system—once the issue of the weight of pensions in its budget has been adjusted—a share of national wealth comparable to that of many European partners. Yet pupil performance has declined in international assessments and equality of opportunity has deteriorated. Moreover, teachers are, on average, less well paid than their counterparts in other European countries—twice as much in Germany.

The problem is therefore not primarily one of resources, but of their allocation, the organisation of the system and its governance.

Healthcare presents a similar picture. France devotes more than 11% of GDP to health expenditure, among the highest levels in the developed world. Yet hospital pressures are increasing, healthcare professionals express deep dissatisfaction, waiting times for care are lengthening in many areas, and coordination between primary care, hospitals and prevention remains insufficiently organised.

German nurses are also paid one-third more than French nurses. Here again, the central issue is not the volume of expenditure but its effectiveness.

This pursuit of efficiency also requires us to reconsider the incentives embedded in our social-protection system. The objective is in no way to challenge the fundamental rights to which the French are legitimately attached. It is to ensure that these rights are exercised in accordance with their purpose and that collective mechanisms do not inadvertently encourage behaviours that ultimately weaken the system itself.

Sick-pay expenditure illustrates this need. It has been increasing much faster than national wealth. A substantial part of this increase is naturally explained by population ageing, wage developments and certain deteriorations in working conditions. But reports by the French National Health Insurance Fund (CNAM) also show that monitoring mechanisms remain insufficient and that practices vary considerably.

The issue is not to challenge legitimate sick leave. It is to ensure that national solidarity fully benefits those who genuinely need it.

The same logic applies to healthcare consumption. France has one of the lowest levels of out-of-pocket healthcare expenditure in the OECD. This reflects a legitimate commitment to protection. But a good whose cost is almost entirely invisible at the point of use tends to be consumed more extensively.

Without questioning universal access to healthcare, it is therefore legitimate to consider how care pathways are organised, the role of the primary-care physician, prevention, and greater individual responsibility through the introduction of a fair and sufficient level of out-of-pocket payment.

The same reasoning applies to employment policies. A solidaristic society must naturally protect those experiencing periods of unemployment or precariousness. But solidarity fully achieves its purpose when it effectively facilitates a return to employment.

The reforms surrounding France Travail, the strengthening of personalised support and changes to unemployment-benefit rules all reflect this logic: the objective is not to oppose rights and duties, but to reconcile them. Social protection is all the more legitimate when it enables people to regain sustainable autonomy rapidly.

This reflection extends beyond these areas. It calls for a reassessment of the entire organisation of government: the multiplication of administrative layers, duplication between public bodies, the proliferation of regulations, the fragmentation of responsibilities and the absence of systematic evaluation of public policies.

Reform does not mean weakening the state. It means enabling it to perform its essential functions more effectively.

The issue ultimately goes beyond budgetary savings. More effective public expenditure improves the services delivered to citizens, strengthens trust, creates room for greater investment in education, research, innovation and the ecological transition, and makes it possible progressively to reduce the weight of operating expenditure in national wealth without diminishing the quality of the social model.

This is precisely what distinguishes a reform policy from an austerity policy. The former seeks to generate greater public value from resources that are more appropriately allocated and better used. The latter merely reduces resources.

Only the former is capable of sustainably breaking France’s vicious circle, rather than merely enduring its consequences.

Restoring the Fundamental Balances: A Democratic as Well as an

Economic Imperative

Reforming public expenditure, raising the employment rate and restoring potential growth are the economic conditions for escaping France’s vicious circle. But they face a deeper difficulty, one that goes far beyond public finances.

Why does a country with a high-quality administration, distinguished economists and strong institutions struggle so much to implement reforms that are extensively documented and have often been successfully introduced by several of its neighbours?

The answer is, to a considerable extent, related to the evolution of our democracy.

Over several decades, our democracy has progressively prioritised the continuous expansion of individual rights and collective protections, without paying comparable attention to the responsibilities that make them possible—or, indeed, while allowing the duties that should accompany the expansion of those rights to decline.

Social progress is an essential achievement. But it cannot be sustained over time except by an economy capable of generating the wealth required to finance it.

As Nicolas Dufourcq has rightly observed, social protection cannot expand indefinitely. This observation does not imply any rejection of solidarity. It recalls an obvious truth that is too often forgotten: every system of collective protection ultimately requires sufficient wealth creation upstream.

When rights expand faster than the economy’s capacity to finance them, debt becomes a means of promising today what national production can no longer afford.

The same imbalance appears in our conception of equality. Reducing excessive inequalities is one of the fundamental functions of the welfare state. But seeking to reduce ever further all differences in income, wealth or circumstances gradually leads to ever-increasing transfers and the taxation required to finance them.

Beyond a certain threshold, this logic ultimately weakens the very factors that create the wealth to be redistributed: work, investment, innovation, entrepreneurship and risk-taking.

Economic history shows that no society can sustainably improve redistribution while simultaneously undermining the conditions for wealth creation.

Social justice and economic efficiency are not opposites; they can be combined and mutually reinforcing when the balance between the two is maintained at a level that permits a socio-economic optimum.

Conversely, when the demand for equality in every respect expands without limit, it eventually weakens the very social model it seeks to protect.

It is this imbalance that now feeds the second vicious circle described in this article. Despite taxation and public expenditure being among the highest in the developed world, citizens observe that deficits persist, debt continues to rise without control, and the effectiveness of several essential public services is increasingly questioned.

This contradiction fuels growing distrust of political leaders and public institutions, between social groups and even among citizens themselves.

International surveys are particularly concerning in this respect. French citizens’ trust in their democratic institutions is now significantly lower than that observed in several major European countries.

This distrust is not merely a symptom; it becomes a cause in its own right. The more trust declines, the harder it becomes for governments to implement structural reforms. And the more reforms are postponed, the more economic imbalances worsen.

Finally, the more these imbalances deteriorate, the further trust continues to erode.

This is the dynamic that, in other work, I have proposed analysing under the term “hyperdemocracy.” This does not refer to democracy being excessive in its principles, but rather to an endogenous drift within democracy, progressively making it less capable of arbitrating between the present and the future, between rights and duties, between solidarity and responsibility, and between redistribution and wealth creation.

It is a democracy that finds it increasingly difficult to say no to immediate demands and that shifts onto debt the trade-offs it no longer dares to make.

Breaking France’s vicious circle therefore requires more than fiscal consolidation. It requires restoring the fundamental balances upon which every sustainable society rests: producing before redistributing, protecting without undermining incentives, guaranteeing rights while reinforcing the duties that make them possible, and investing in the future rather than financing the present through debt.

Only under these conditions can trust gradually be restored—a prerequisite for the success of the reforms themselves.

Today, the state of France’s public finances requires important decisions. But the right diagnosis must first be established. The debate is currently dominated to a large extent by an accounting or static approach. We can no longer ignore the causes of the trajectory France has followed for more than forty years. Nor is it acceptable to disregard what international experience teaches us.

Against this background, proposing once again to increase compulsory levies and the rate of redistribution in order to accompany some subsequent reductions in expenditure amounts to reproducing the very mechanism that brought us into this predicament.

This strategy may appear reassuring because it creates the impression of accelerating fiscal consolidation or distributing the burden of adjustment more evenly. But it remains based on a view that overlooks the actual dynamics of cause and effect.

It fails to recognise that, in an already heavily taxed economy, another increase in compulsory levies risks further weakening corporate competitiveness and the attractiveness of work—and therefore the employment rate, potential growth and, ultimately, public finances themselves.

Nor does it recognise that by providing another period of fiscal respite, it may once again encourage the postponement of fundamental reforms, while further aggravating the already widespread state of distrust in France.

The challenge, therefore, is to break with a logic that consists in financing for ever longer the consequences of our imbalances rather than addressing their causes.

This requires reforming the organisation of public action in order to improve the effectiveness of every euro spent. It requires sustainably increasing the employment rate, a key determinant of potential growth and future public revenues.

It also requires restoring coherent incentives within our social-protection system, so that it fully protects those who need it while encouraging employment, responsibility, risk-taking and wealth creation.

Finally, it requires rebuilding trust by restoring the fundamental balances between rights and duties, solidarity and responsibility, redistribution and production, the present and the future—balances that underpin democracy and prosperity themselves.

Ultimately, trust is the true capital of a democracy.

It cannot be decreed. It cannot be purchased through debt. Nor can it be regained through a succession of tax increases.

It emerges from a country’s ability to look lucidly at its difficulties, accept the reforms that are necessary, and demonstrate over time that public action can be both effective, responsible and fair.

Only under these conditions can France finally escape the vicious circle in which it has progressively become trapped.

This is in no way about calling the French social model into question. Quite the opposite. The best way to preserve it is to restore the economic and societal foundations that will ensure its long-term sustainability.

A generous system of social protection cannot thrive indefinitely on an economy that is weakening and a society in which trust is eroding.

Professor of Economics at HEC Paris