Last year, consumption of French manufactured goods, food and energy fell by 0.5% on average, the largest drop since 1997. Even during the 2008-2009 recession, the decline was not as marked. December was particularly bad (- 0.7%), raising fears of a difficult early 2012 against a backdrop of rising unemployment. Paradoxically, the government relies on the announcement of a social VAT to encourage the French to bring forward purchases before the increase in the rate in October.Increased VAT Supposed to Help!?
Straight from the economically insane department, French president Nicolas Sarkozy wants to improve sales by increasing taxes. His belief is consumers will make major purchases before the rise in taxes.
Lovely.
What about the collapse in sales afterword? What about the need to hire then fire masses of workers because companies ramp up production now in expectation of increased sales now (that may or may not even happen), only to get rid of them later?
The idea that borrowing sales from the future will accomplish anything good is preposterous. Generally politicians make such proposals in attempt to speed up the economy by carefully timing tax credits to help their election chances. In this case Sarkozy proposed the opposite way to bring forward sales.
Bear in mind that Sarkozy's VAT increase would happen in October but French presidential elections are in April and May. Those elections are too soon for Sarkozy to benefit from his proposal. Taxpayers would likely put off purchases of major consumer goods as long as possible. Thus, an increase in sales (demand pulled forward) would likely be in July, August, and September, not February, March, and April.
Challenger François Hollande jumped all over Sarkozy's increased VAT proposal. He has a more populist message, far more likely to resonate with voters: Hollande Vows to Tax the Rich, Take Pay Cut.
Election politics aside, the French economy is slowing far more rapidly than most expected. Increased taxes whether on everyone or just the rich, certainly will not help. Such economically inane programs will intensify the strength and the length of the European recession.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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