In 2019, French households are expected to benefit from major purchasing power gains, which we forecast at roughly 2.5%, the biggest increase since 2007.
Several factors will contribute to this big gain. Tax cuts will be the most visible source, but measures to support earned income and social benefits will also play a key role.
Milder expected inflation will also help, but this factor could be reversed, especially if the current upturn in oil prices continues.
Households’ purchasing power is regularly a key issue in France. Today it is drawing even more attention, largely because of the paltry gains of the past decade. The sluggishness of purchasing power gains is one of the explanations for the current social malaise, as expressed by the “yellow vest” (gilets jaunes) movement. Part of the response to these difficulties consequently lies in a boost to purchasing power, in particular through tax cuts.
Three rounds of measures were launched: those introduced in the 2018 and 2019 finance bills, the emergency economic and social measures (MUES) approved in late December 2018 and additional measures following the conclusion of the Great National Debate, which were announced by Emmanuel Macron during a press conference on 25 April 2019. According to our estimates, the first two sets of measures will boost purchasing power by nearly 2.5% in 2019 (after a 1% gain in 2018). Some of these measures, along with the new ones presented following the Great National Debate, will continue to boost purchasing power in 2020. Based on a preliminary calculation, these new measures lift our forecast of purchasing power gains by 0.5 points, from 1% to 1.5%.
Before going any further, we must first define what we mean by “purchasing power”. This term is widely used but does not always mean the same thing. It can be used to cover very different individual situations that deviate from the macroeconomic benchmark defined by the national accounts. This is one reason for the sometimes big gap between people’s feeling and experience and the aggregated figures.
Using the national accounts definition, purchasing power is a measure of real gross disposable income (GDI). Disposable income refers to the portion of household income that is available after paying taxes and social contributions (whose weighting is slightly above 20% of pre-tax income). Pre-tax income is comprised essentially of earned income (which accounts for about 60%), as well as social benefits (about 30%) and capital income (15%). Gross income refers to the fact that it is not adjusted for fixed capital consumption pertaining to self-employed businesses and home ownership. It is real once it has been adjusted for prices. Purchasing power gains are thus the difference between the nominal GDI growth rate and inflation[1].