Quarterly Selection BANQUE DE FRANCE of Articles BULLETIN WINTER 2013-2014 32 114-032 Reply form q My personal details have changed. Please update my subscription information accordingly: Subscription number: First name: __________________________ Surname: ________________________ Company: ___________________________ Job title: __________________________ Address: _____________________________ Post code: ____________________________ Town: ____________________________ Country: _____________________________ q I wish to cancel my subscription to the Quarterly Selection of Articles of the Banque de France: Subscription number: _________________ First name: ___________________________ Surname: ________________________ Company: ____________________________ This publication is being sent to you from the Banque de France since you are in its electronic contact list. Your details will not be divulged to third parties. If you wish to change your details or if you no longer wish to receive this publication, please let us know at any time by sending this printed form to: Banque de France 07-1397 SDRP Pôle Support aux relations externes 75049 Paris Cedex 01, or an e-mail to: [email protected]. 2 Banque de France • Quarterly Selection of Articles • No. 32 • Winter 2013-2014 CONTENTS |ARTICLES How do VAT changes affect inflation in France? 5 Erwan Gautier and Antoine Lalliard What impact is a VAT change expected to have on consumer prices? On the basis of past cases, the changes in the two VAT rates on 1 January 2014 are expected to have a moderate impact on inflation. Securitisation in France: recent developments 29 Omar Birouk and Françoise Darves Securitisation is growing at a moderate pace in France. With total outstanding securitised assets of EUR 215 billion at mid-2013, France ranks fifth in the euro area. The majority of securitised assets are loans to French residents. Securitisation has facilitated banks’ access to Eurosystem refinancing. Financial situation of the major listed groups in H1 2013: faltering growth coupled with debt reduction 49 Claire Mangin, Lionel Rhein and Matthieu Roche-Toussaint In the first half of 2013, turnover of the 76 leading industrial and commercial groups levelled off. Net profit only dipped moderately and picked up slightly from the lows recorded at the end of 2012. Groups reduced their financial debt by taking cash from reserves accumulated in 2012 and as well as by selling assets. Financial structures remained sound and the outlook appears more favourable. The performances of French firms deteriorated in 2012 but they consolidated their financial structures 77 Dominique Lefilliatre and Lionel Rhein In 2012, disparities were observed among the financial positions of French firms. Activity slowed down, profits fell and the rise in equity was smaller than in 2011. Nevertheless, firms’ financial structures improved and their cash position reached a 15-year high. Innovation at work: introducing the first banknote in the Europa series 113 Aurélie Marchand and Enda Palazzeschi On 2 May 2013, a new series of euro-denominated banknotes, known as the “Europa” series, was put into circulation throughout the Eurosystem. This constituted an unprecedented challenge for the national central banks and the cash industry as a whole. Banque de France • Quarterly Selection of Articles • No. 32 • Winter 2013-2014 3 CONTENTS Title |PUBLISHED ARTICLES Quarterly Selection of Articles (since Winter 2006) 137 |OTHER PUBLICATIONS AVAILABLE IN ENGLISH 143 |STATISTICS Contents S1 Economic developments S3 Money, investment and financing S13 Financial markets and interest rates S27 Other statistics S35 No part of this publication may be reproduced other than for the purposes stipulated in Articles L.122-5. 2° and 3° a) of the Intellectual Property Code without the express authorisation of the Banque de France, or where applicable, without complying with the terms of Article L.122-10. of the said code. © Banque de France — 2014 4 Banque de France • Quarterly Selection of Articles • No. 32 • Winter 2013-2014 ARTICLES How do VAT changes affect inflation in France? Erwan Gautier Antoine Lalliard Microeconomic Business Conditions and Structural Research Directorate and Macroeconomic Forecasting Directorate and University of Nantes VAT rates changed in France on 1 January 2014 to finance the plan to stimulate business competitiveness: the standard and intermediate rates increased from 19.6% to 20% and from 7% to 10% respectively, while the reduced rate remained unchanged at 5.5%. Since VAT is a tax that is proportional to the value excluding tax of the good or service sold, changes in VAT rates should theoretically impact consumer prices. So how are these VAT changes expected to affect inflation? This article makes an empirical assessment of the direct inflationary impact1 of VAT changes since 1995. VAT changes have often had significant but short-lived effects on retailers’ adjustment behaviour and on inflation. We find that approximately 80% of VAT changes are passed on to consumer prices one quarter after the rate change. Many euro area countries recently raised their VAT rates, and indirect taxation contributed close to 0.5 of a percentage point (pp) to euro area inflation in 2012 and 2013. In France, the VAT rate changes on 1 January 2014 are likely to result in an increase in inflation of between 0.4 and 0.5 pp. The price adjustment should be swift and the inflationary effects of the VAT changes will last just a few months. In the current setting of moderate inflation (close to 1% year-on-year), these changes to VAT rates do not pose a major risk to price stability. Key words: inflation, VAT, price adjustment JEL codes: E31, E62, H22 1 Excluding second-round effects due to macroeconomic adjustments (impact on consumer spending or price-wage spiral, for example). Banque de France • Quarterly Selection of Articles • No. 32 • Winter 2013-2014 5 ARTICLES How do VAT changes affect inflation in France? ince 2010, many euro area countries have undertaken substantial fiscal consolidation in response to the need to curb government debt. In particular, to boost revenues, some governments have opted to Sraise rates of direct taxation, such as income tax, and indirect taxation, i.e. consumer taxes generally levied by retailers on the State’s behalf. Changes in indirect taxation influence prices because the after-tax price paid by the consumer is the sum of the before-tax price, whose payment is kept by the merchant as earnings, and taxes. Indirect taxes comprise taxes that are proportional to the value of the good, such as value added tax (VAT), and excise duties, which are charged per unit of the good sold (examples in France include the internal consumption tax on energy products and duties on alcoholic drinks). Since 2010, the contribution of indirect taxes to euro area inflation has increased, rising to around 0.5 pp in 2012 (ECB, 2011 and ECB, 2012). As part of France’s National Pact for Growth, Competitiveness and Employment, two VAT rates in France were changed on 1 January 2014: the standard rate went from 19.6% to 20% and the intermediate rate from 7% to 10%. How are these changes likely to affect inflation in France? If we assume that when standard and intermediate VAT rates change retailers do not adjust before-tax prices and pass on these changes in full to after-tax prices, then the two VAT increases should add just under 0.2 and 0.4 pp respectively to inflation, giving a theoretical impact from the VAT changes of slightly less than 0.6 pp of inflation in January 2014. But the pass-through of VAT changes to inflation may be slow and partial. Section one of this article considers the linkage between VAT and inflation. From an analysis of VAT changes since 1995, we estimate in section two the degree and speed of the pass-through of VAT changes to inflation. In the final section, we conclude that in the event of a partial adjustment, the short-term impact of changes in VAT rates on inflation could be between 0.4 and 0.5 pp, and that the adjustment would be swift and concentrated in the month of January. In the current context of moderate inflation (close to 1%), the impact of these VAT changes does not present a major risk for price stability. 1| What effect is a VAT change expected to have on consumer prices? In France, several indirect taxes were modified recently: a tax on soft drinks2 and an intermediate VAT band were created in January 2012, and the excise duty on beer went up in October 2012. However, these 2 See Berardi et al. (2012) for an assessment of the impact of this tax on prices. 6 Banque de France • Quarterly Selection of Articles • No. 32 • Winter 2013-2014 ARTICLES How do VAT changes affect inflation in France? Chart 1 Standard VAT rate in six euro area countries (%) 24 22 20 18 16 14 12 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 France Italy Spain Portugal Greece Germany Source: European Commission. taxation changes had a relatively moderate impact on aggregate inflation (Insee, 2012). VAT is the number-one source of tax revenues in France, generating approximately EUR 140 billion in 2012,3 and in recent years has been one of the most commonly used indirect taxation instruments to make tax adjustments in euro area countries (see Chart 1). In Spain, for example, the standard rate of VAT increased from 16% to 21% between 2010 and 2013. In France, four VAT rates apply to different classes of household consumption.4 The standard rate of 19.6% covers approximately 55% of products in the price index, including virtually all manufactured products, alcohol, tobacco, energy and one-quarter of services. The intermediate rate of 7% applies to around 15% of the price index, particularly to some services (including restaurants, home improvement, transport and cultural services) and to a few goods such as non-refunded health products.