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Economic Study 2/21/2020

Birth and death of French companies

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Bruno Cavalier
Chief Economist at ODDO BHF

If we judge the French economy by the demographics of its businesses then the verdict is irrefutable: the present situation is one of the best experienced in a very long time. Business start-ups are soaring, bankruptcies are falling, a phenomenon typical of an expanding economy. Whilst these developments are not a leading indicator of future growth, they do allay recurring concerns related to social disruption (rejection of reforms) and political uncertainty (unpopularity of Macron). In any case, it is little short of astonishing that business creation is so strong in a country with such a high tax burden.

The fortnight’s focus

According to INSEE, the number of new companies created exceeded 800,000 in 2019, a record (+18% compared to 2018). Stripping out self-contractors (autoentrepreneurs), who make up 47% of this total, this implies an increase of 430,000 "standard" companies, again a record. For the past three years, this has mainly concerned corporate consulting and trade and warehousing, a sideline to the development of the digital economy; last year, there was also a marked upturn in construction. All told, the uptrend, initiated in 2015, is gaining momentum (chart lhs). According to the Banque de France, the number of business failures was close to 51,000 in 2019 (-5%), the lowest level since 2008 (chart rhs). This concerns most sectors. Loan outstandings of bankrupt companies account for around 0.4% of the total, down from the peaks of 2009 and 2014, two periods when the economy was emerging from recession.

Has France become a paradise for entrepreneurs? Far from it. The tax burden remains heavy. In the budget trade-offs at the time of the “Yellow Vests” crisis, the government chose to postpone the cut in the corporate rate tax1. The weight of taxes on production remains prohibitive, not to mention the complexity of their calculation. According to the government’s economic think tank2, they represent 3.6% of companies’ value-added compared with less than 0.5% in Germany. This hampers competitiveness. The government accepts the principle of reducing these taxes, but this means foregoing tax revenues. A conundrum for the finance ministry? The president of the jury for the 2019 entrance exam to ENA, the school that trains France’s top public servants, recently deplored the fact that a large proportion of candidates saw companies only "as a source of financing for the State's action"! Since 2015, under then president François Hollande, with Emmanuel Macron Minister of the Economy at the time, efforts have been made to recreate a more favourable climate for companies (tax credit, lower social security contributions, flexibility). This project is still far from being completed.

1. In 2020, the corporate tax rate is 31% for large companies, 28% for all others. The goal is to align the rates at 25% in 2022. 2. See Martin & Trannoy (2019), "Taxes on Production: The Good, the Bad and the Ugly", CAE

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