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France: 2015 Article IV Consultation—Concluding Statement
May 19, 2015
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
We see a solid short-term recovery, but structural rigidities continue to weigh on medium-term prospects. Important progress has recently been made to address them, notably by reducing the tax wedge on labor and advancing supply-side reforms. However, continued efforts are needed to tackle France’s fundamental economic problems: high structural unemployment, low potential growth, and record-high public spending. Our main recommendations are to:
Adopt structural reforms, at all levels of government, to improve the efficiency of public spending and limit its growth to inflation.
Enhance flexibility for social partners at the firm level and facilitate the employment of the young and low skilled.
Maintain the momentum on supply-side reforms to restore competitiveness and encourage investment, including by removing obstacles to enterprise growth.
1. The French economy is recovering, but its growth potential still appears much weaker than before the crisis. After almost four years of near-stagnation, we project real GDP growth to rise to 1.2 percent this year, above the government’s forecast. The recovery is supported by a highly accommodative external environment, in particular sharply lower oil prices, a depreciated euro, and interest rates at historic lows. The initial rebound has been driven by household consumption and exports are set to pick up as well. However, investment has not yet responded, unemployment remains stubbornly high, and public debt continues to rise. Moreover, the positive external impulses may dissipate soon while structural rigidities continue to weigh on France’s growth potential—estimated by staff to average just 1¼ percent over the next five years, notwithstanding dynamic labor force growth.
2. The fiscal strategy has rightly shifted to expenditure-based consolidation. High and rising government spending has been at the heart of France’s fiscal problems for decades. Driven in particular by local governments, social security, and the wage bill, general government expenditure reached a record high of 57.5 percent of GDP last year, 11 percent of GDP above the euro area average. While the growth of central government and health care spending has been contained in recent years, local government spending has continued to expand, and social spending is the highest in the OECD. The persistent spending pressures have pushed up not only public debt but also the tax burden on the private sector to very high levels. After years of significant fiscal adjustment through higher revenues, the switch to spending-based consolidation is the right strategy, and should be maintained for the coming years.
3. To ensure that medium-term fiscal objectives are met, we recommend that spending growth be anchored to the rate of inflation, starting in 2016. While we project that the fiscal deficit will be brought narrowly to below 3 percent of GDP in 2017, we see a risk that this target will be missed in the event of adverse shocks. The macroeconomic assumptions underlying the April 2015 Programme de Stabilité are prudent, but the expenditure measures needed to implement the program are not yet fully specified. Moreover, the planned pace of adjustment provides little margin in the event that growth and inflation disappoint or new spending needs arise. Keeping spending flat in real terms would deliver structural fiscal adjustment of about 0.5 percent of GDP per year, and build larger buffers to achieve the medium-term deficit objectives, including structural balance by 2020. Crucially, it would help ensure that public debt is on a firm downward trajectory by 2017. Specific measures should include:
Near-term budgetary savings. The government should specify additional structural measures to keep general government spending flat in real terms in 2016, while reaffirming that any windfall gains from higher revenues or lower interest rates will be saved.
Expenditure reviews. Building on recent efforts, regular broad-based expenditure reviews should assess the efficiency and quality of public spending at all levels of government in order to identify structural savings. This should include a review of staffing levels and promotion practices, as well as more targeted policies such as on housing benefits and family allowances.
Local government. The indicative spending target (ODEDEL) for 2016 should be limited to the projected rate of inflation, complemented by the planned reduction in transfers and tighter caps on local taxes and borrowing. Over the medium term, real spending at the local level should be reduced based on reviews of staffing, territorial reform, and inter-communal consolidation of institutions.
Social security funds. Building on recent reforms, the (still low) effective retirement age should be increased further, including by streamlining of special pension regimes and by taking steps to ensure the financial sustainability of complementary pensions. Unemployment and welfare benefits should be made more efficient, and health spending controlled through further structural measures that help meet the ONDAM spending target.
4. High unemployment and stagnant job creation remain the defining challenge for France’s policymakers. Important steps have been taken to address these issues, in particular through a reduction of the tax wedge on lower salaries under the Pacte de Responsibilité and CICE tax credit, the 2013 agreements to enhance social partners’ flexibility at the enterprise level, and the planned measures under the loi Macron to reduce judicial uncertainties around dismissals through a reform of the prud’hommes system. However, without further structural reforms, the unemployment rate is likely to decline only very slowly.
5. We see a need to build on these welcome reforms with additional, broad-based efforts to return to pre-crisis rates of job creation. Specifically:
Enterprise-level agreements. Building on recent reforms, flexibility for social partners to agree at firm level on hours and wages should be expanded to enterprises beyond those in economic difficulty.
Minimum wage. While the minimum wage plays an important social role, annual increases should be limited to inflation as long as unemployment remains high, especially among the young and low skilled.
Benefits. Unemployment benefits should give more incentives for job search, including by tightening eligibility criteria and introducing degressivity. Job search requirements should be enforced for both the unemployment insurance and social welfare benefit system.
Education and training. Existing resources should be better targeted to build professional capacity for the young and the unemployed.
6. Recent momentum on product market reforms should be maintained. The decline in competitiveness over the previous decade continues to weigh on exports and investment. The loi Macron would liberalize legal professions, retail, and coach transport, while enhancing the Competition Authority’s mandate. The efforts led by the Business Simplification Council should help reduce red tape. The disincentives for smaller companies to grow above certain employee thresholds should be reduced, including by easing labor-related regulations as envisaged under the draft loi Rebsamen, but also other legal requirements such as accounting, tax, and profit sharing. The functioning of the housing sector should be reviewed as well, with a view to removing constraints on the supply of affordable housing.
7. France’s financial sector has further to go to adapt to a changing economic and regulatory environment. The 2014 Comprehensive Assessment by the ECB did not result in any banks needing to raise additional capital, and bank lending is gradually picking up. However, the decline in interest rates to historic lows is putting pressure on margins for banks and insurance companies, while the prospects of continued tightening of regulatory standards may further weigh on their profitability. To ensure the efficient functioning of the financial sector, we recommend a reduction in the guaranteed interest rates under the regulated savings schemes, which hampers the efficient transmission of the ECB’s monetary policy.
We thank the authorities for their kind hospitality and very productive policy discussions.
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