On our series analysing how France has suffered as a result of the reckless economic strategies, we meet small business owners in Toulouse who are crippled by payroll taxes that stifle growth and still fail to pay for the lavish benefits system

‘I’ve had enough,” says Charline Petit, the young co-owner of the bagel café on Place St-Aubin in central Toulouse. “I’ve been at this for three years, but I haven’t been able to pay myself since January. I can’t carry on like this, so I’m closing down.

“Everything is taxed. You can’t move without being taxed. Even when you are not making any money, you are taxed. I had to lie about my income to rent an apartment. So then the tax authorities said I had not been declaring enough. I was taxed again. If I stopped working, I would get all kinds of benefits, but as a business person, I get nothing. You are better off unemployed.”

To say “nothing” is possibly a bit of an exaggeration. In return for all those taxes, the French state funds a widely admired universal health service – better on many measures than our own National Health Service – and some of the most generous pension arrangements anywhere in the world.

Nowhere else on the planet is the gap between pensioner and worker income quite as narrow as it is in France. Provided he’s worked enough years, a train driver can expect to retire on 80 per cent of salary at just 60 years of age. It’s the same for those who work for the government-controlled Electricité de France, or the vast payroll attached to the paraphernalia of the French state.

But Ms Petit is not persuaded. “Those pensions,” she says, “they are not for non-salaried workers, the self-employed and small traders like me. They are for salaried people and public-sector workers. The politicians talk about the need for start-ups, that we are the future, but the whole system pushes us towards bankruptcy and the black economy. It’s hopeless.”

Ms Petit may be at the end of her tether, but her complaint is shared by business people the length and breadth of the land. France, one leading economist once remarked, is communism that works. Even accepting that France’s social model did indeed once work – and the apartheid in state benefits between the regulated and unregulated sectors has always made the claim more than a little suspect – the question is: for how much longer?

Generous public services and entitlements are only affordable if the economy prospers sufficiently to pay for them, and the French economy is most certainly not prospering. Growth has ground to a halt, unemployment is off the scale, particularly among the young, and oppressively high levels of taxation, in combination with restrictive labour laws, have undermined all prospect of meaningful business expansion and job creation.

Worse, with intense pressure from Brussels for deficit reduction, the French tax authorities have been gouging the business sector for every last cent, further destroying the incentives for job and wealth creation. The officiousness – often verging on the outright vindictive – of the process, with every last transaction and payslip subject to the closest possible scrutiny, is driving many small enterprises, and even large corporates, to despair. Fines for slight lapses in compliance are automatic and often existential.

Observers have been writing the French economy’s obituary for almost as many years as I’ve been in business journalism but somehow or other, it keeps trundling along. And, of course, there are many aspects of French economic life that both impress and defy the national caricature of decline – world-class infrastructure, technological innovation and levels of productivity among them. Make no mistake, despite the economically illiterate policies of François Hollande and many of his predecessors, France somehow continues to function – just about.

REUTERS/Christian Hartmann French President Francois Hollande addresses a news conference at the Elysee Palace in Paris.

Hollande has undoubtedly made an untenable situation a great deal worse. Yet he is also the only representative of a wider malaise and wrong-headedness in French political life, one that rejects the realities of globalisation, is culturally averse to profit-motivated enterprise, despises the rich and spurns all attempts at meaningful reform.

The sclerosis in the economy finds its mirror image in the paralysis and backward-looking negativity of France’s political establishment. Many despair of the chances of change.

Rather than accept the case for reform, France voted at the last presidential election to further pull up the drawbridge and retreat into the tried-and-failed socialism of the past. Despite the economically disastrous consequences of these policies, they are mistakes that the Miliband-led Labour Party would inevitably repeat, with its extravagant promises of French-style health care and a social safety net. To the extent that these are deliverable at all, Miliband has pledged to fund them by taxing wealth more, an approach that would threaten the same economic paralysis as afflicts France. Creaking at every joint, there is a sense in which France is finally reaching a tipping point.

The system is self-evidently no longer affordable, or even, in its divisiveness between a bloated, self-interested state and a struggling private sector, remotely desirable. Attempts to sustain the social contract with ever higher levels of taxation have succeeded only in further reducing the economy’s capacity to pay. A “citizen’s conference” organised by the free-market think tank, the Institut Montaigne found appreciation of the need for, and appetite for, change to be better among ordinary voters than politicians themselves.

To observe some of these stresses and strains, I’ve come to Toulouse, France’s fourth-largest city, set in the glorious Midi-Pyrénées in southwestern France. As home to Airbus, and the cluster of hi-tech aerospace companies that feed off its largesse, as well as one of France’s largest universities, there is a buzz and energy about the place that is sadly lacking in many French regional cities. Polling regularly finds it to be the city French people would most like to live in.

REUTERS/Regis DuvignauA general view shows the city hall of Toulouse, February 24, 2014.

But first, a little context. To sustain its social contract, France has some of the highest payroll taxes anywhere in the world, and indeed levels of taxation more generally. According to Medef, France’s equivalent of the CBI, the basic numbers are these. For every euro paid to the employee, the employer will pay on average 48 cents in payroll tax, easily the highest in Europe, or indeed anywhere in the OECD.

The equivalent figure for the United States is 15.9 per cent, and for Germany 35 per cent. Indeed, as a percentage of income, the amount paid out by French business in social taxes is higher than the entire tax burden, including all income tax and other employee-paid insurance contributions, on labourers in the US.

As part of a new “grand bargain” between business and workers launched this summer amid much fanfare, the government has committed to cut these taxes by €40bn over three years. However, even if delivered, it only narrows the competitiveness disadvantage with Germany by a third.

Taking account of the income and social taxes paid in addition by the employee, the numbers look starker still. “For every 50 cents the employee gets,” says Annabelle Gausserand, co-owner with her husband, Nicolas, of Next Media Factory, a producer of specialised medical videos and communications tools, located on the Canal du Midi a little way out from the centre of Toulouse, “I have to pay the state one euro.”

To demonstrate the point, she shows me a payslip that details a bewildering array of different charges. I count at least 12 before (for reasons of confidentiality) she pulls it away, including something called a “generalised social contribution” – a relatively recent addition to help deal with the deficit – and a mysteriously labelled “contribution to social autonomy and solidarity”.

Other charges include pensions, health care, family allowance, workplace accidents, training and so on. She shrugs her shoulders in classically Gallic fashion: “I don’t know what they are all for. It’s just a time-wasting expense as far as I’m concerned.

“For sure, if I didn’t have to pay so much to the state, I would employ more people, but it is a struggle as things stand. We did take on a full-time employee recently, someone who was long-term unemployed, and we asked whether there was any help with social taxes for a small enterprise like ours. They said, if you were a charity, there would be help, but because you are a profit-making business, there is none. This is typical of the attitude. We are treated with suspicion, as if we are guilty of something or trying to cheat them. The tax demands we get are close to extortion.”

Why stay, I ask? “We’ve had offers to move,” she says, “from Switzerland, London and America, but this is where we live. We have to make do.” Many are not so loyal, though even on this front, the French state has been hot on the case, with punitive “exit taxes” on anyone who tries to leave. One businessman describes it as like a form of imprisonment.

As I walk through the picturesque lanes of central Toulouse, I encounter a demonstration outside a public building. The protest is on behalf of actors, performers and entertainers who are seeing some of their entitlements threatened by a half-hearted attempt at benefit reform. It is easy to see why they would be upset. Establish a certain level of intermittent income as a registered artist and it will be matched in unemployment benefits should you fall short. Is this even an effective, let alone an affordable way of supporting the arts? Many would argue that it is just a gravy train.

Small businesses can still thrive in France. On my tour around Toulouse, I encounter four promising young digital start-ups – SchoolMove, Popeline & Macaron, Payname and Unitag, all of them making their own special contribution to the great commercial transformation that the new technologies are bringing about. Even the leviathan of the French state finds it difficult to stand in their way.

REUTERS/Benoit Tessier

At La Cantine Numérique, which offers cheap, communal office space to digital start-ups, the entrepreneurialism and enthusiasm of inhabitants is manifest. Yet all complain of the high social costs and, just as bad, restrictive labour laws, which make it costly to hire and fire. Most start-ups don’t survive past three years, when tax exemptions run out. Here’s one, very telling statistic. France and Britain are economies of roughly equal size and population, yet France has a third fewer SMEs. The growth companies of the future are increasingly hard to find.

To survive at all, many SMEs substitute full-time employees with “auto-entrepreneurs”, a form of self-employment that allows the employer to avoid at least some of the social charges and pay the worker as if on a specific contract. The tax authorities regard it as a semi-illegal form of “disguised employment”, but reluctantly tolerate the practice in many instances, for fear of the further damage a crackdown would do to an already deeply impaired labour market.

At Sogeclair, a relatively big aerospace engineer that employs around 600 in the Toulouse area and, among other things, produces the central wing box for the new Airbus A350, the chief executive Philippe Robardey doesn’t even particularly blame the deeply unpopular Mr Hollande. “It is a progressive problem of the French social model,” he says, “whatever the politics of the government, socialist or not. Sarkozy was just as bad. He promised free-market reform and to cut taxes, but he ended up raising them and still he managed to add to the national debt.

“Our engineers here in France cost us more than anywhere else in Europe – Germany, UK and Spain – even though they are paid less. For years, it’s just been more cost for less money.”

I venture that at least France has a world-beating health care system, which seems quite cleverly to combine public provision with semi-compulsory private insurance. “Really?” he says. “Is life expectancy significantly better in France than in the UK? The system is abused. If you told the French they could have free food, you’d soon have a nation of obese Frenchmen. It’s the same with health care. Because people pay so much tax for it, they make limitless use of it.”

As far as medication is concerned, he’s certainly right. French citizens are required to make small co-payments to visit the doctor, but that doesn’t deter them. Prescriptions and treatments are effectively free or reimbursed, even for paracetamol.

Statistically, the French pop more pills per head of population than anywhere else in the world. France’s gold-plated health care system has given birth to a nation of hypochondriacs. Homeopathy and spa holidays on the public purse, taxi fares to and from hospital, it’s all part of the service and regarded by French citizenry as a matter of right. Not for France the dramatic cuts in health care provision forced on much of the eurozone periphery.

More use of less costly generics scarcely counts, and in any case, has failed to make a significant dent in the shortfall between payroll health insurance taxes and actual expenditure. To all intents and purposes, French health care is bust.

The same is true of the pay-as-you-go pensions system, which accounts for roughly half of the payroll taxes charged to employers. To fulfil his election pledge to limit the retirement age to 62, Hollande has raised contributions from employers and employees even further and slightly reduced entitlements. But the system is still bankrupt on any realistic view of likely economic growth and demographics. The payroll taxes are simply not enough to fund the benefits.

To survive and prosper in the modern world, France needs root-and-branch reform of its archaic labour laws, entitlements system and its payroll taxes. Yet it has a government intent only on protecting them.

Sadly, a crisis even more serious than the present one may be needed before France summons up the collective will for meaningful change. For such a potentially dynamic and influential nation, it’s a tragedy to behold.