Growth, inequality… What would the French economy look like without the tariff shield?

According to the Banque de France, growth forecasts for 2021 were 6.2% for 2022 and 3.7% for 2023. In 2022, these growth projections are just 2.85% and 1% for the same two years (the projections are included in the 2023 fiscal law). This sharp decline in growth is mainly due to the war in Ukraine, which has caused energy supply problems. In this context of weak growth and inflation coexisting, purchasing power doubles down as rising consumer prices and sluggish activity squeeze out wage increases.

From the end of 2021, the French government introduced a tariff shield that lowers the purchase price of energy products. French inflation of 6.4% in 2022 is much lower than Italy (8%), Germany (8.3%), Belgium (10.3%) and the Netherlands (12%).

This French exception does not mean that its economy is growing less than its neighbors, because low inflation can actually cut demand in half. Thus, according to the Organization for Economic Co-operation and Development (OECD), Germany’s growth is projected at 1.8% in 2022 and 0.3% in 2023.

There would be less growth

To assess the contribution of the tariff shield to the explanation of this economic indicator, it is necessary to answer two questions: (I) what would have happened if the rate hike had not been implemented in 2022 and 2023? ; (ii) What if it is not renewed in 2023 knowing that it was introduced in 2022?

For the budgeted expenditure, which we estimate at 58 billion for 2022 and 52 billion for 2023, the growth rate will be 1.75 points for 2022 and 0.08 points for 2023. This additional growth caused by the tariff shield is achieved in a “captured” context. inflation: this measure would have reduced inflation by 1.1 points in 2022 and 1.8 points in 2023.

Our estimate of the impact of the tariff shield on inflation published in the last note by the Center for Economic Research and Its Applications (Cepremap) is therefore lower than that of the National Institute of Statistics and Economic Research (Insee). Indeed, it takes into account the postponement of consumption, which shrinks current demand and therefore reduces inflationary pressures, as well as the reduction in margins accepted by companies in this context of sharply rising costs.

The price-wage loop would be triggered

The success of the tariff shield is due to its role as a brake on the price-wage loop. Without this measure, the strongest inflationary pressures would have led to higher wage growth and weaker growth, while higher labor costs would have reduced employment. Moreover, even if French inflation is only a fraction of European inflation, this additional inflation will ultimately lead to further increases in European Central Bank (ECB) key interest rates, which will dampen economic activity.

If the tariff shield applied in 2022 were not renewed in 2023, and this happened unexpectedly, the forecasts for 2022 would not be changed, but the forecasts for 2023 would be lowered: the increase would be almost halved (from 1%) There will be up to 0.55% and 0.4 points more inflation.

This additional inflation from not renewing the tariff shield in 2023 may appear modest. Indeed, the mechanical effect of ending the shield is inflation, with “subsidized” prices becoming “effective” prices. However, since the 2022 shield prevents the triggering of the price-wage loop, which is strongest during the sharp rise in energy prices (ie in 2022), inflation increases modestly compared to the scenario with two years of protection. .

As for the trajectory of public debt, the cost of the shield is partially absorbed by the growth surplus and therefore the tax revenues it generates: debt growth is 2.2 percentage points of GDP, compared to the previous value of about 3 percentage points. GDP. The smaller increase in interest rates it provides also allows to moderate increases in the debt burden.

There would be more inequality

The tariff shield also made it possible to reduce inequalities. Indeed, the least well-off households are the most affected by the increase in energy prices, as they devote a greater proportion of their income to it.

With the shield, an advantaged household (10% highest income) consumes 2.4 times more than a modest household (lowest 10% income). Without the shield, inequalities would be even greater, with a privileged household consuming 2.5 times more than a modest household. Without a tariff shield, the energy crisis is more inflationary and reduces the consumption opportunities of those who are the main source of income, i.e. low-income families.

A rate shield further helps households that depend heavily on income from work by saving jobs and curbing inflation.

Is wage indexation desirable?

In this inflationary context, some have advocated the idea of ​​accompanying the tariff shield with faster indexation of wages to prices. Our calculations show that this type of indexation actually allows workers to see their real hourly wages increase. However, the number of hours worked is decreasing in the end reduces payroll and growth. Thus, the loss of growth is 0.63 points in 2022, and the gain in 2023 is minimal, 0.03 points. Inflation increased by 1.1 points in 2022 and by 0.2 points in 2023.

This inflationary context leads to a sharper rise in interest rates in the medium term, increasing the debt burden: the debt-to-GDP ratio increases by 1.6 percentage points compared to the scenario without indexation. Finally, since indexation applies to all workers, it does not reduce inequality, it only reduces the hours worked by all workers and therefore the purchasing power of the entire population.

Finally, because indexation applies to all workers, it does not reduce inequalities.

But what about redistributive recovery policies?

An alternative to a tariff shield would be to distribute a ‘voucher’ to all households corresponding to their non-compressible energy costs. We assume that this non-compressible cost corresponds to 20% of the average consumer’s energy consumption, i.e. about 500 euros per household (25% of the price of the tariff shield) for a budget cost of 15 billion.

This recovery policy is also redistributive, as this same transfer for all represents a larger share of the budget for the poorest: 31% of energy consumption for the poorest 10%, versus 14% for the richest 10%.

Our estimates further show that this policy increases inflation by 1.4 points in 2022 and 1.9 points in 2023, higher than if inflation did not rise due to the supply shock. In addition to this, additional demand from households.

However, this demand support allows growth to be maintained to some extent: compared to the economy without the tariff shield, growth of 0.44 is achieved in 2022 and 0.35 in 2023. But now if we compare this policy with the tariff shield, it shows a growth deficit of 0.85 points in 2022 and 0.27 points of growth for 2023, that is, an average of 0.45 points of annual growth lost over these two years.

The government’s fiscal balance has also worsened: even with the less costly reform, lost growth and a sharp rise in interest rates caused by rising inflation lead to a 6.8 percentage point increase in the debt-to-GDP ratio.

In terms of inequalities, this redistributive policy allows them to be reduced more strongly, as the advantaged household consumes only 2.05 times more than the disadvantaged one. However, this reduction in inequality would occur in an economy where all households would consume less than in an economy with a tariff shield.

Therefore, these analyzes clearly show that when faced with a supply shock such as an energy shock, a redistributive demand policy like the one we tested “naturally” dominates a supply policy such as a tariff shield. They also show that the wage index hurts growth and employment. A tariff shield would therefore be a good compromise between inflation, growth, purchasing power, but also inequalities, expansion of which could also be limited by this measure.

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