## cr17288

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### Macro outlook and growth drivers
- Real GDP growth projected: 1.6 percent in 2017 and 1.8 percent in 2018.
- Growth drivers:
  - buoyant corporate investment (supported by a low interest environment and temporary tax incentives),
  - a rebound in residential construction,
  - solid consumer demand.
- Net exports: a drag on growth, reflecting both exceptional 2016 factors and weak external competitiveness.
- Output gap and potential output:
  - Staff’s estimate of the output gap projected to be reduced to 1¼ percent of GDP in 2018.
  - Potential output growth projected to rise from an estimated 1 percent in 2016 to 1½ percent by 2022.
  - Potential output (change in percent): 1.0 (2015), 1.0 (2016), 1.1 (2017), 1.3 (2018).
  - Memo: potential output per working age person: 0.6 (2015), 0.6 (2016), 0.6 (2017), 0.8 (2018).
  - Output gap: -2.4 (2015), -2.2 (2016), -1.8 (2017), -1.3 (2018).

### Inflation and labor market
- Inflation:
  - CPI (year average): 0.1 (2015), 0.3 (2016), 1.2 (2017), 1.3 (2018).
  - GDP deflator: 1.1 (2015), 0.4 (2016), 0.8 (2017), 1.2 (2018).
  - Headline inflation expected to average 1.2 percent in 2017.
  - Core inflation low: ½ percent year-on-year in the second quarter of 2017.
- Labor market:
  - Unemployment rate (percent): 10.4 (2015), 10.0 (2016), 9.5 (2017), 9.0 (2018).
  - Employment (percent change): 0.2 (2015), 0.6 (2016), 0.7 (2017), 0.5 (2018).
  - Labor force (percent change): 0.3 (2015), 0.3 (2016), 0.0 (2017), 0.0 (2018).
  - Total compensation per employee: 1.0 (2015), 1.1 (2016), ... (2017), ... (2018).
- Finding: Despite the cyclical upturn, inflation outlook remains subdued and core inflation has not risen materially; unemployment has begun to recede moderately from its 10 percent post-crisis mark.

### Fiscal stance and public finances
- General government balance (percent of GDP): -3.6 (2015), -3.4 (2016), -3.0 (2017), -3.0 (2018).
- Revenue (percent of GDP): 53.1 (2015), 53.0 (2016), 53.1 (2017), 52.5 (2018).
- Expenditure (percent of GDP): 56.7 (2015), 56.4 (2016), 56.2 (2017), 55.6 (2018).
- Structural balance (percent of pot. GDP): -2.0 (2015), -1.9 (2016), -1.8 (2017), -2.2 (2018).
- Primary balance (percent of GDP): -1.7 (2015), -1.7 (2016), -1.4 (2017), -1.4 (2018).
- General government gross debt (percent of GDP): 95.6 (2015), 96.3 (2016), 96.8 (2017), 97.0 (2018).
- Staff assessment:
  - Fiscal consolidation on a structural basis has stalled since 2015 and the public debt ratio is still rising.
  - Government strategy: rein in public spending to gradually reduce the fiscal deficit while lowering the tax burden.
  - Success depends on timely specification and implementation of efficiency-oriented expenditure reforms and comprehensive spending reviews.

### Structural reform agenda and staff policy recommendations
- Government reform priorities:
  - Rein in public spending and create room for tax relief.
  - Labor market reforms: enhance firm-level flexibility in labor negotiations, reduce judicial uncertainty related to dismissals, revamp unemployment insurance, and improve professional training and apprenticeship programs.
  - Tax reforms: cut the corporate income tax rate and reduce the labor tax wedge; design reforms to boost growth, employment, and competitiveness.
- IMF staff and Executive Directors’ recommendations:
  - Implement deep spending reforms at all levels of government: reduce the wage bill, consolidate local governments, improve targeting of social benefits, make health spending more efficient, and further raise the effective retirement age.
  - Specify measures needed to meet 2017/2018 deficit targets, as many measures were yet to be specified.
  - Complement corporate tax cuts with measures to improve efficiency of capital taxation: limit exemptions, reduce the debt bias, eliminate disincentives to company growth, unify tax rates on interest, dividends, and capital gains, and streamline taxation of long-term savings.
  - Strengthen competition in services and simplify business regulations.
  - Complement labor law reform with measures to integrate vulnerable groups (youth and low-skilled) and continue wage moderation.

### External sector and competitiveness
- Trade and external balances (percent of GDP):
  - Exports of goods: 21.0 (2015), 20.7 (2016), 21.0 (2017), 20.6 (2018).
  - Imports of goods: -22.1 (2015), -21.9 (2016), -22.4 (2017), -21.7 (2018).
  - Trade balance: -1.9 (2015), -2.0 (2016), -2.3 (2017), -2.0 (2018).
  - Current account: -0.4 (2015), -1.0 (2016), -1.1 (2017), -0.8 (2018).
  - FDI (net): -0.1 (2015), 0.1 (2016), 0.2 (2017), 0.4 (2018).
- Assessment:
  - France’s external position assessed to be weaker than implied by fundamentals.
  - Improving external competitiveness requires structural reform, tax relief, and wage moderation to reduce a moderate real effective exchange rate overvaluation and support net export growth.

### Financial sector and macro-financial risks
- Credit and interest rates:
  - Growth of credit to the private non-financial sector: 3.2 (2015), 4.1 (2016), 5.2 (2017), 5.8 (2018).
  - Money market rate (Euro area): -0.2 (2015), ... (2016), ... (2017), ... (2018).
  - Government bond yield, 10-year: 0.8 (2015), 0.5 (2016), ... (2017), ... (2018).
- Balance sheet indicators:
  - Corporate debt among the highest in the euro area, at 128 percent of GDP (figure stated in text).
  - Household debt: 57 percent of GDP.
  - Official reserves (US$ billion): 55.2 (2015), 56.1 (2016), ... (2017), ... (2018).
- Recommendations and risks:
  - Financial sector more resilient since the crisis; large banks strengthened balance sheets.
  - Banks and insurers need to adapt to the low interest environment, new technologies, and evolving regulatory standards.
  - Supervisors should remain vigilant to market risks—including a potential increase in interest rates—and the rise in corporate indebtedness.
  - Macro-financial analysis indicates loose financial conditions likely contributed to the cyclical upturn (Annex II).

### Key quantitative indicators (selected)
- Real economy (change in percent):
  - Real GDP: 1.1 (2015), 1.2 (2016), 1.6 (2017), 1.8 (2018).
  - Domestic demand: 1.6 (2015), 1.9 (2016), 1.9 (2017), 1.7 (2018).
  - Private consumption: 1.4 (2015), 2.2 (2016), 1.2 (2017), 1.6 (2018).
  - Public consumption: 1.1 (2015), 1.3 (2016), 1.2 (2017), 0.5 (2018).
  - Gross fixed investment: 1.0 (2015), 2.9 (2016), 2.9 (2017), 3.1 (2018).
  - Foreign balance (contr. to GDP growth): -0.5 (2015), -0.8 (2016), -0.3 (2017), 0.0 (2018).
  - Exports of goods and services: 4.3 (2015), 1.8 (2016), 3.0 (2017), 3.9 (2018).
  - Imports of goods and services: 5.7 (2015), 4.2 (2016), 3.5 (2017), 3.5 (2018).
  - Nominal GDP (billions of euros): 2194 (2015), 2229 (2016), 2283 (2017), 2351 (2018).
- Savings and investment (percent of GDP):
  - Gross national savings: 22.3 (2015), 22.0 (2016), 22.1 (2017), 22.3 (2018).
  - Gross domestic investment: 22.8 (2015), 23.0 (2016), 23.3 (2017), 23.0 (2018).

### Downside risks and the reform timing
- Main downside risk: weak implementation of reforms could falter if political/social opposition complicates social dialogue and undermines business sentiment.
- External risks include:
  - Geopolitical disruption or financial stress from market corrections.
  - Global policy uncertainty (including trade policies and post-Brexit negotiations).
  - Higher interest rates negatively impacting corporate balance sheets.
  - Debt dynamics deterioration in the event of a growth shock and failure to consolidate (Annex III and Annex IV).
- Implementation timing and authorities’ aims:
  - Government aims to move swiftly to enact the bulk of reforms before the end of next year.
  - Authorities’ fiscal and macro assumptions (Rapport préparatoire au débat d’orientation des Finances Publiques): Real GDP growth 1.6 percent in 2017 to 1.8 percent by 2022; Inflation expected to average 1.4 percent; over five years cut public spending as a share of GDP by over 3 percentage points; lower the tax burden by 1 percentage point; reduce the deficit from 3 percent in 2017 to ½ percent of GDP in 2022.
  - Implementation status at time of reporting: fiscal consolidation efforts underway; initial package of labor reforms expected to be enacted by end-September; several tax cuts due to be implemented in 2018.

### Government program — key elements and staff advice
- Rationalize public expenditure:
  - Bring the budget deficit to about ½ percent of GDP by 2022; reduce spending by more than 3 percentage points of GDP over the next 5 years.
  - Cut public sector employment by about 120,000, including 70,000 at the local level; reintroduce freeze of public sector wage scale.
  - Invest €50 billion over the next five years in training, environmental initiatives, health, agriculture, government modernization, and transportation.
  - Reform the pension system by unifying different regimes and introducing a points-based or notional accounts system.
  - Planned conversion of the CICE into a permanent cut in employer social contributions would reduce the spending ratio by an additional 0.9 percent of GDP.
- Reduce unemployment / labor reforms:
  - Enhance firm-level labor negotiation scope; cap compensation for unfair dismissals; introduce a flexible project contract type.
  - Replace the CICE with a permanent 6 percent reduction in employer payroll contributions.
  - Cut employee payroll contributions, financed by an increase in the general income tax.
  - Strengthen professional training and improve apprenticeships.
- Boost external competitiveness / tax reforms:
  - Gradually reduce the corporate tax rate from 33 percent to 25 percent.
  - Replace the wealth tax with a narrower tax on real estate.
  - Introduce a unified tax of around 30 percent on interest income, dividends, and capital gains.
  - Reduce and later eliminate the local housing tax.
  - Reduce charges for micro-enterprises, particularly during their first year.
- Staff’s high-level advice:
  - Limit primary spending growth to around the rate of inflation, targeting budget balance by 2022.
  - Implement deep spending reforms at all levels to reduce spending and enhance efficiency; efficiency-oriented reforms could reduce public spending by 3–4 percentage points of GDP by 2022.
  - Ensure training and apprenticeship reforms are well designed, tighten unemployment benefit eligibility, and strengthen job search requirements and incentives.
  - Broaden corporate tax reforms to address debt bias and inefficient exemptions; simplify start-up regulations and liberalize services.

### Macro-structural scenarios and quantitative impacts
- Methodology notes:
  - Fiscal multipliers assumed to be one when the output gap is closed and move with the business cycle; higher when there is economic slack.
  - Calibration of reform impacts based on prior model simulations (GDP level increases of around 1.2–1.6 and 3–3.7 percent over 5 and 10 years respectively; corresponding growth impacts of 0.2–0.3 and 0.3–0.4 percentage points at 5 and 10 years respectively).
- Baseline with identified reforms and gradual fiscal consolidation:
  - Real GDP growth projected to increase to close to 2 percent in the medium term.
  - Potential growth projected to gradually rise to 1.5 percent over the next five years.
  - Unemployment projected to fall to just below 8 percent by 2022, and to around 7 percent within ten years.
  - Slowdown in real primary spending growth to about 0.2 percent per year (excluding the impact of the CICE conversion) from 2019–22.
  - Structural deficit reduced to around 1 percent of GDP by 2022.
  - Public debt dynamics turn around in 2019, with debt declining gradually to around 91 percent of GDP in 2022.
- Comprehensive structural and spending reforms scenario:
  - Assumes full implementation plus additional tax, labor, and product market reforms in line with staff advice.
  - Adds 0.2 percentage points to potential growth over the medium term.
  - Broad, efficiency-enhancing spending reforms keep real spending growth flat until 2022 while limiting the drag on growth.
  - Larger payoffs in outer years: improved fiscal position and higher long-term growth improve debt dynamics and reduce unemployment more than baseline.
- Unchanged policy (counterfactual) scenario:
  - No reform or fiscal adjustment: potential GDP growth remains lower, structural unemployment higher.
  - Fiscal deficit significantly higher over the medium term due to more rapid real primary spending growth and higher debt service from an increased sovereign risk premium.
  - Debt dynamics become problematic in outer years as a result of low growth and a high deficit.
- Stylized scenario series (selected table entries, preliminary staff projections):
  - Baseline Scenario (Real GDP growth series): 1.2 1.6 1.8 1.9 1.9 1.9 1.8 ...1.5
  - Comprehensive Structural and Spending Reforms (Real GDP growth series): 1.2 1.6 1.6 1.9 1.9 1.9 1.9 ...1.7
  - Unchanged Policy Scenario (Real GDP growth series): 1.2 1.6 1.6 1.5 1.9 1.9 1.7 ...1.3
  - Gross debt (baseline series): 96.3 96.8 97.0 97.0 95.6 93.6 91.2 ...80.8
  - Footnotes: 4/ Growth projections reflect changes in the fiscal stance relative to the baseline. The revenue and spending multipliers are assumed to be 1.0 when the output gap is zero, and move with the cycle. 2/ Full implementation of tax, labor, and product market reforms, broadly in line with staff advice. Relative to baseline, potential growth is higher by about 0.2 percent over the medium term. 3/ No major policy changes or structural reforms. Real spending growth at 1.2 percent per year, no tax changes, primary balance unchanged at around zero after 2020, and 150 bp higher risk premia. 1/ Staff's preliminary projections reflecting information on policies and reforms specified as of July 2017.

### Debt Sustainability and stress tests (Annex III highlights)
- Baseline DSA headline projections:
  - Debt-to-GDP ratio projected to peak at 97 percent in 2019 and decline to 91.2 percent by 2022.
  - Debt-to-GDP in 2016: 96.3 percent.
  - Effective interest rate projected to decline further until 2018 before increasing to reach 2 percent in 2022.
  - Interest payments: 1.9 percent of GDP in 2016; projected to decline to 1.7 percent of GDP in 2018 and stabilize at 1.8 percent of GDP until 2022.
  - Gross financing needs peaked at 9 percent of GDP in 2016 due to debt maturity structure.
  - Part of debt increase reflects financial support to other Euro area countries: grew from 0.2 percent of GDP in 2010 to 3.2 percent of GDP in 2014; amounted to 3.0 percent of GDP in 2016.
- Main DSA table excerpts (nominal gross public debt, percent of GDP):
  - 2015: 79.9; 2016: 95.6; 2017: 96.3; 2018: 96.8; 2019: 97.0; 2020: 97.0; 2021: 95.6; 2022: 93.6.
- Stress-test outcomes (selected):
  - Growth shock (1.5 percentage points lower over 2018–19): debt-to-GDP would increase to 104 percent of GDP in 2019 and decline thereafter.
  - Primary balance shock (cumulative 1.5 percent deterioration over 2018–22): debt-to-GDP would increase to 98.9 percent of GDP in 2019 and decline thereafter.
  - Interest rate shock (280 basis points increase): in 2022 impact on gross financing needs is 0.9 percent of GDP and 2.1 percent of GDP for the debt-to-GDP ratio.
  - Combined macro-fiscal shock: debt would reach 104.3 percent of GDP in 2019 and decline to 100.1 percent of GDP in 2022; gross financing needs would peak at 12.5 percent of GDP in 2019.

### Risk Assessment Matrix (Annex IV) — selected risks and policy responses
- High-likelihood risks:
  - Policy and geopolitical uncertainties (High): policy response — support trade liberalization, contribute to smooth Brexit, secure benefits of economic integration.
  - Dislocation in labor flows / sharp rise in migrant flows (High): policy response — integrate migrants via active labor market policies, language and skill training.
- Medium-likelihood risks:
  - Structurally weak growth in key economies (Medium): policy response — accelerate structural reforms to boost competitiveness and productivity.
  - Weak implementation of fiscal and structural policy commitments (Medium): policy response — early locking in of reforms and a conservative fiscal path.
  - Financial imbalances from protracted low interest rates (Medium): policy response — monitor lending standards and bank buffers; monitor life insurance sector.
  - Unexpected financial regulatory changes (Medium): policy response — promote further restructuring and cost cutting in banks.
- RAM notes: "low" = probability below 10 percent; "medium" = 10–30 percent; "high" = 30 percent or more.

### Labor-market vulnerabilities and targeted measures
- Vulnerable groups: youth, the low-skilled, and immigrants from outside the EU account for a large share of structural unemployment.
- Empirical and programmatic statistics:
  - Total private sector jobs created since 2014Q4: 525 000 private sector jobs.
  - Growth in 2016: 1.2 percent.
  - Carryover at end-2017Q2: + 1.4 percent.
  - Staff revised growth projections: 1.6 percent in 2017 and 1.8 percent in 2018.
  - Share of young professionals (25-34 years old) who completed upper secondary education: 44.7 percent.
  - Investment plan total amount: 50 billion euros; amount dedicated to training: 15 billion euros.
  - Corporate income tax decrease planned from 33.3 percent to 25 percent by 2022.
  - Capital taxation rate set at unique rate: 30 percent.
  - Existing interest deduction allowance: 25 percent.
  - Ratio of non-performing loans to total loans in 2016: 3.9 percent.
- Targeted recommendations:
  - Professional training for the young and low-skilled; apprenticeship reform and linking training to labor market needs.
  - Reforms of the minimum wage formula and unemployment insurance; strengthen job search requirements and incentives.
  - Convert CICE (around 1 point of GDP) into a permanent cut of employers’ social contributions by 2019 with transitional mitigation (CICE rate reduction from 7 percent to 6 percent the year of conversion).
  - Eliminate employees’ social contributions to health insurance and compensate via increased CSG.
  - Phase out the housing tax over the next three years depending on revenue levels.

### Key takeaways and policy implications
- Timely and full implementation of sufficiently ambitious reforms is critical to:
  - Achieve the authorities’ growth and fiscal objectives.
  - Create fiscal space and improve debt dynamics.
  - Reduce structural unemployment and raise potential growth.
- Main risks:
  - Political support must remain strong over an extended period because growth payoffs from reforms may take time to materialize.
  - If reform momentum slows, medium-term growth and fiscal objectives will be difficult to achieve and debt dynamics could deteriorate significantly.
- Priority reform features highlighted by staff:
  - Deep, efficiency-oriented spending reforms to underpin consolidation while allowing tax relief.
  - Detailed implementation plans for unemployment insurance and professional training/apprenticeship reforms.
  - Broader tax reform to address inefficiencies and distortions and to magnify competitiveness gains.
  - Continued efforts to simplify business regulations and enhance competition in services.

*IMF staff report for the 2017 Article IV consultation (France), selected excerpts (cr17288).*

### 1.8 percent in 2018. Growth is primarily driven by buoyant corporate investment, a rebound in

### cr17288 - 1.8 percent in 2018. Growth is primarily driven by buoyant corporate investment, a rebound in

### Macro outlook and growth drivers
- Real GDP growth is projected at 1.6 percent in 2017 and 1.8 percent in 2018.
- Growth is primarily driven by:
  - buoyant corporate investment (supported by a low interest environment and temporary tax incentives),
  - a rebound in residential construction,
  - solid consumer demand.
- Net exports have been a drag on growth, reflecting both exceptional 2016 factors and weak external competitiveness.
- Output gap and potential output:
  - Staff’s estimate of the output gap is projected to be reduced to 1¼ percent of GDP in 2018.
  - Potential output growth is projected to rise from an estimated 1 percent in 2016 to 1½ percent by 2022.
  - Potential output (change in percent): 1.0 (2015), 1.0 (2016), 1.1 (2017), 1.3 (2018).
  - Memo: potential output per working age person: 0.6 (2015), 0.6 (2016), 0.6 (2017), 0.8 (2018).
  - Output gap: -2.4 (2015), -2.2 (2016), -1.8 (2017), -1.3 (2018).

### Inflation and labor market
- Inflation:
  - CPI (year average): 0.1 (2015), 0.3 (2016), 1.2 (2017), 1.3 (2018).
  - GDP deflator: 1.1 (2015), 0.4 (2016), 0.8 (2017), 1.2 (2018).
  - Headline inflation expected to average 1.2 percent in 2017.
  - Core inflation low: ½ percent year-on-year in the second quarter of 2017.
- Labor market:
  - Unemployment rate (percent): 10.4 (2015), 10.0 (2016), 9.5 (2017), 9.0 (2018).
  - Employment (percent change): 0.2 (2015), 0.6 (2016), 0.7 (2017), 0.5 (2018).
  - Labor force (percent change): 0.3 (2015), 0.3 (2016), 0.0 (2017), 0.0 (2018).
  - Total compensation per employee: 1.0 (2015), 1.1 (2016), ... (2017), ... (2018).
- Finding: Despite the cyclical upturn, inflation outlook remains subdued and core inflation has not risen materially; unemployment has begun to recede moderately from its 10 percent post-crisis mark.

### Fiscal stance and public finances
- General government balance (percent of GDP): -3.6 (2015), -3.4 (2016), -3.0 (2017), -3.0 (2018).
- Revenue (percent of GDP): 53.1 (2015), 53.0 (2016), 53.1 (2017), 52.5 (2018).
- Expenditure (percent of GDP): 56.7 (2015), 56.4 (2016), 56.2 (2017), 55.6 (2018).
- Structural balance (percent of pot. GDP): -2.0 (2015), -1.9 (2016), -1.8 (2017), -2.2 (2018).
- Primary balance (percent of GDP): -1.7 (2015), -1.7 (2016), -1.4 (2017), -1.4 (2018).
- General government gross debt (percent of GDP): 95.6 (2015), 96.3 (2016), 96.8 (2017), 97.0 (2018).
- Staff assessment:
  - Fiscal consolidation on a structural basis has stalled since 2015 and the public debt ratio is still rising.
  - The government’s strategy focuses on reining in public spending to gradually reduce the fiscal deficit while lowering the tax burden.
  - Success of the gradual expenditure-based consolidation plan will critically depend on timely specification and implementation of efficiency-oriented expenditure reforms and comprehensive spending reviews.

### Structural reform agenda and policy recommendations
- Government reform priorities:
  - Rein in public spending and create room for tax relief.
  - Labor market reforms: enhance firm-level flexibility in labor negotiations, reduce judicial uncertainty related to dismissals, revamp unemployment insurance, and improve professional training and apprenticeship programs.
  - Tax reforms: cut the corporate income tax rate and reduce the labor tax wedge; design reforms to boost growth, employment, and competitiveness.
- IMF staff and Executive Directors’ recommendations:
  - Implement deep spending reforms at all levels of government, including reducing the wage bill, consolidating local governments, improving targeting of social benefits, making health spending more efficient, and further raising the effective retirement age.
  - Specify many measures needed to meet 2017/2018 deficit targets, as many measures were yet to be specified.
  - Complement corporate tax cuts with measures to improve efficiency of capital taxation: limit exemptions, reduce the debt bias, eliminate disincentives to company growth, unify tax rates on interest, dividends, and capital gains, and streamline taxation of long-term savings.
  - Strengthen competition in services and simplify business regulations.
  - Complement labor law reform with measures to integrate vulnerable groups (youth and low-skilled) and continue wage moderation.

### External sector and competitiveness
- Trade and external balances (percent of GDP):
  - Exports of goods: 21.0 (2015), 20.7 (2016), 21.0 (2017), 20.6 (2018).
  - Imports of goods: -22.1 (2015), -21.9 (2016), -22.4 (2017), -21.7 (2018).
  - Trade balance: -1.9 (2015), -2.0 (2016), -2.3 (2017), -2.0 (2018).
  - Current account: -0.4 (2015), -1.0 (2016), -1.1 (2017), -0.8 (2018).
  - FDI (net): -0.1 (2015), 0.1 (2016), 0.2 (2017), 0.4 (2018).
- Assessment:
  - France’s external position is assessed to be weaker than implied by fundamentals.
  - Improving external competitiveness requires structural reform, tax relief, and wage moderation to reduce a moderate real effective exchange rate overvaluation and support net export growth.

### Financial sector and macro-financial risks
- Credit and interest rates:
  - Growth of credit to the private non-financial sector: 3.2 (2015), 4.1 (2016), 5.2 (2017), 5.8 (2018).
  - Money market rate (Euro area): -0.2 (2015), ... (2016), ... (2017), ... (2018).
  - Government bond yield, 10-year: 0.8 (2015), 0.5 (2016), ... (2017), ... (2018).
- Balance sheet indicators:
  - Corporate debt among the highest in the euro area, at 128 percent of GDP (note: figure stated in text).
  - Household debt: 57 percent of GDP (stated as manageable).
  - Official reserves (US$ billion): 55.2 (2015), 56.1 (2016), ... (2017), ... (2018).
- Recommendations and risks:
  - Financial sector has become more resilient since the crisis, with large banks strengthening balance sheets and providing financing.
  - Banks and insurers need to continue adapting to low interest environment, new technologies, and evolving regulatory standards.
  - Supervisors should remain vigilant to market risks—including a potential increase in interest rates—and the rise in corporate indebtedness.
  - Macro-financial analysis indicates loose financial conditions likely contributed to the cyclical upturn (Annex II).

### Key quantitative indicators (selected)
- Real economy (change in percent):
  - Real GDP: 1.1 (2015), 1.2 (2016), 1.6 (2017), 1.8 (2018).
  - Domestic demand: 1.6 (2015), 1.9 (2016), 1.9 (2017), 1.7 (2018).
  - Private consumption: 1.4 (2015), 2.2 (2016), 1.2 (2017), 1.6 (2018).
  - Public consumption: 1.1 (2015), 1.3 (2016), 1.2 (2017), 0.5 (2018).
  - Gross fixed investment: 1.0 (2015), 2.9 (2016), 2.9 (2017), 3.1 (2018).
  - Foreign balance (contr. to GDP growth): -0.5 (2015), -0.8 (2016), -0.3 (2017), 0.0 (2018).
  - Exports of goods and services: 4.3 (2015), 1.8 (2016), 3.0 (2017), 3.9 (2018).
  - Imports of goods and services: 5.7 (2015), 4.2 (2016), 3.5 (2017), 3.5 (2018).
  - Nominal GDP (billions of euros): 2194 (2015), 2229 (2016), 2283 (2017), 2351 (2018).
- Savings and investment (percent of GDP):
  - Gross national savings: 22.3 (2015), 22.0 (2016), 22.1 (2017), 22.3 (2018).
  - Gross domestic investment: 22.8 (2015), 23.0 (2016), 23.3 (2017), 23.0 (2018).

*Source: IMF staff report for the 2017 Article IV consultation (France).*

### 6.      The main downside risk relates to the implementation of reforms, which could falter if

### 6.      The main downside risk relates to the implementation of reforms, which could falter if

### Downside risks
- Political/social opposition to reforms could:
  - Complicate social dialogue and undermine business sentiment, slowing investment and hiring.
  - Derail fiscal consolidation, entrenching the budget deficit and public debt at current high levels.
  - Weaken the credibility of euro area governance, creating outward spillovers.
- External risks include:
  - Geopolitical disruption or financial stress from market corrections.
  - Global policy uncertainty (including trade policies and post-Brexit negotiations) affecting France’s external position and investment.
  - Higher interest rates negatively impacting corporate balance sheets.
  - Debt dynamics deterioration in the event of a growth shock and failure to consolidate (Annex III and Annex IV).
- Additional risks to staff’s baseline projections:
  - Lower-than-assumed pay-off from structural reforms.
  - Greater drag on growth from fiscal consolidation and ECB monetary normalization.
- Upside conditional: swift implementation of a broad and ambitious reform package could brighten medium-term growth and employment.

### The Reform Strategy — objectives and timing
- Government aims:
  - Make France’s economy more dynamic and public finances sustainable through large public spending reductions and structural reforms.
  - Move swiftly to enact the bulk of reforms before the end of next year.
- Fiscal and macro assumptions in authorities’ initial projections (Rapport préparatoire au débat d’orientation des Finances Publiques):
  - Real GDP growth: 1.6 percent in 2017 to 1.8 percent by 2022.
  - Inflation: expected to average 1.4 percent.
  - Over five years: cut public spending as a share of GDP by over 3 percentage points; lower the tax burden by 1 percentage point; reduce the deficit from 3 percent in 2017 to ½ percent of GDP in 2022.
  - Structural reforms assumed to raise potential growth very modestly and bring the unemployment rate down to about 7 percent by 2022.
- Implementation status:
  - Fiscal consolidation efforts underway.
  - Initial package of labor reforms expected to be enacted by end-September.
  - Several tax cuts due to be implemented in 2018.

### Key economic challenges (staff diagnosis)
- Persistent fiscal imbalances:
  - Government spending reported as the highest in the EU at 56½ percent of GDP.
  - Public debt ratio “nearly triple digits” and continuing to increase.
  - Expenditure-based consolidation since 2014 has fallen short.
- Stubbornly high unemployment:
  - Unemployment described as high and largely structural, with long-term unemployment rising and employment rates falling for vulnerable groups (the young, low-skilled, and non-EU immigrants).
- Weak external competitiveness:
  - Export growth underperformed relative to Germany.
  - Current account deficit of just over 1 percent of GDP in 2016, which is 2¾ percent of GDP below the EBA-estimated norm when correcting for the cycle.
  - Staff considers the real exchange rate to be overvalued by between 8 and 14 percent (Annex I).

### Government program (key elements summarized)
- Rationalize public expenditure:
  - Bring the budget deficit to about ½ percent of GDP by 2022; reduce spending by more than 3 percentage points of GDP over the next 5 years.
  - Cut public sector employment by about 120,000, including 70,000 at the local level; reintroduce freeze of public sector wage scale.
  - Invest €50 billion over the next five years in training, environmental initiatives, health, agriculture, government modernization, and transportation.
  - Reform the pension system by unifying different regimes and introducing a points-based or notional accounts system.
  - Note: the planned conversion of the CICE into a permanent cut in employer social contributions would reduce the spending ratio, as measured in this report, by an additional 0.9 percent of GDP.
- Reduce unemployment / labor reforms:
  - Enhance firm-level labor negotiation scope; cap compensation for unfair dismissals; introduce a flexible project contract type.
  - Replace the CICE with a permanent 6 percent reduction in employer payroll contributions.
  - Cut employee payroll contributions, financed by an increase in the general income tax.
  - Strengthen professional training and improve apprenticeships.
- Boost external competitiveness / tax reforms:
  - Gradually reduce the corporate tax rate from 33 percent to 25 percent.
  - Replace the wealth tax with a narrower tax on real estate.
  - Introduce a unified tax of around 30 percent on interest income, dividends, and capital gains.
  - Reduce and later eliminate the local housing tax.
  - Reduce charges for micro-enterprises, particularly during their first year.

### Staff’s related and additional advice (high level)
- Fiscal:
  - Limit primary spending growth to around the rate of inflation, targeting budget balance by 2022, with flexibility regarding the precise fiscal consolidation path under the rules.
  - Implement deep spending reforms at all levels to reduce spending and enhance efficiency (reduce wage bill, consolidate local government, improve targeting of social benefits, make health spending more efficient, raise effective retirement age).
  - Efficiency-oriented reforms could reduce public spending by 3–4 percentage points of GDP by 2022.
- Labor market:
  - Ensure professional training and apprenticeship reforms are well designed and tighten unemployment benefit eligibility, strengthen job search requirements, and incentives.
  - Contain wage growth by enhancing enterprise-level negotiation flexibility and limit automatic minimum wage increases to inflation.
- Tax and product markets:
  - Broaden corporate tax reforms to address debt bias, disincentives to company growth, inefficient exemptions, and production taxes.
  - Simplify regulations for start-ups and further liberalize services.
- Macro impact claims:
  - Comprehensive labor market reforms could increase potential growth by around 0.2 percentage points over the medium term.
  - Well-designed comprehensive reforms could increase the TFP contribution to potential growth by up to 0.2 percentage points in the medium term.

### Macro-structural scenarios and quantitative impacts
- Methodology notes:
  - Fiscal multipliers assumed to be one when the output gap is closed and move with the business cycle; higher when there is economic slack.
  - Calibration of reform impacts based on prior model simulations (GDP level increases of around 1.2–1.6 and 3–3.7 percent over 5 and 10 years respectively; corresponding growth impacts of 0.2–0.3 and 0.3–0.4 percentage points at 5 and 10 years respectively).
- Scenario: Baseline with identified reforms and gradual fiscal consolidation
  - Real GDP growth projected to increase to close to 2 percent in the medium term.
  - Potential growth projected to gradually rise to 1.5 percent over the next five years.
  - Unemployment projected to fall to just below 8 percent by 2022, and to around 7 percent within ten years.
  - Slowdown in real primary spending growth to about 0.2 percent per year (excluding the impact of the CICE conversion) from 2019–22.
  - Structural deficit reduced to around 1 percent of GDP by 2022.
  - Public debt dynamics turn around in 2019, with debt declining gradually to around 91 percent of GDP in 2022.
- Scenario: Comprehensive structural and spending reforms
  - Assumes full implementation plus additional tax, labor, and product market reforms in line with staff advice.
  - Adds 0.2 percentage points to potential growth over the medium term.
  - Broad, efficiency-enhancing spending reforms keep real spending growth flat until 2022 while limiting the drag on growth.
  - Larger payoffs apparent in outer years: improved fiscal position and higher long-term growth improve debt dynamics and reduce unemployment more than baseline.
  - Near-term tradeoff: faster fiscal adjustment can partly offset short-term growth and employment gains.
- Scenario: Unchanged policy (counterfactual)
  - No reform or fiscal adjustment: potential GDP growth remains lower, structural unemployment higher.
  - Fiscal deficit significantly higher over the medium term due to more rapid real primary spending growth (at the average of the past few years) and higher debt service from an increased sovereign risk premium.
  - Debt dynamics become problematic in outer years as a result of low growth and a high deficit.

### Key takeaways and policy implications
- Timely and full implementation of sufficiently ambitious reforms is critical to:
  - Achieve the authorities’ growth and fiscal objectives.
  - Create fiscal space and improve debt dynamics.
  - Reduce structural unemployment and raise potential growth.
- Main risks:
  - Political support must remain strong over an extended period because growth payoffs from reforms may take time to materialize.
  - If reform momentum slows, medium-term growth and fiscal objectives will be difficult to achieve and debt dynamics could deteriorate significantly.
- Priority reforms and design features highlighted by staff:
  - Deep, efficiency-oriented spending reforms to underpin consolidation while allowing tax relief.
  - Detailed implementation plans for unemployment insurance and professional training/apprenticeship reforms.
  - Broader tax reform to address inefficiencies and distortions and to magnify competitiveness gains.
  - Continued efforts to simplify business regulations and enhance competition in services.

*IMF staff report: France (selected excerpts).*

### 15.      The authorities stressed their determination to seize the current window of

### cr17288 - 15.      The authorities stressed their determination to seize the current window of

### Overview
- Authorities committed to push wide-ranging reforms to transform the French economy by making it more dynamic and bolstering fiscal sustainability, following President Macron’s campaign platform and respecting European obligations. Immediate priorities: enact the recently unveiled labor reform package and reduce the budget deficit to 3 percent of GDP.

### Stylized Macro-Structural Scenarios (selected series from Table 2)
- Baseline Scenario (Preliminary Staff Projection Based on Identified Policies and Reforms) 1/
  - Real GDP growth: 1.2 1.6 1.8 1.9 1.9 1.9 1.8 ...1.5
  - Potential GDP growth: 1.0 1.1 1.3 1.4 1.4 1.5 1.5 ...1.6
  - Output gap: -2.2 -1.8 -1.3 -0.8 -0.3 0.0 0.3 ...0.0
  - Employment rate: 61.4 61.9 62.2 62.4 62.8 63.1 63.3 ...64.3
  - Unemployment rate: 10.0 9.5 9.0 8.7 8.3 8.0 7.8 ...7.3
  - Revenue: 53.0 53.1 52.5 51.6 51.3 51.2 50.9 ...50.9
  - Expenditure: 56.4 56.2 55.6 54.8 53.1 52.4 51.7 ...51.8
  - Fiscal balance: -3.4 -3.0 -3.0 -3.2 -1.8 -1.2 -0.8 ...-0.9
  - Structural fiscal balance: -1.9 -1.8 -2.2 -2.6 -1.6 -1.2 -1.0 ...-1.0
  - Gross debt: 96.3 96.8 97.0 97.0 95.6 93.6 91.2 ...80.8

- Comprehensive Structural and Spending Reforms 2/4/
  - Real GDP growth: 1.2 1.6 1.6 1.9 1.9 1.9 1.9 ...1.7
  - Potential GDP growth: 1.0 1.1 1.3 1.4 1.5 1.6 1.6 ...1.8
  - Output gap: -2.2 -1.8 -1.5 -1.0 -0.7 -0.4 -0.2 ...0.0
  - Employment rate: 61.4 61.9 62.2 62.5 62.8 63.2 63.5 ...65.2
  - Unemployment rate: 10.0 9.5 9.1 8.6 8.2 7.9 7.6 ...6.4
  - Revenue: 53.0 53.1 52.5 51.6 51.3 51.2 50.9 ...50.1
  - Expenditure: 56.4 56.2 55.5 54.7 52.9 52.1 51.3 ...50.2
  - Fiscal balance: -3.4 -3.0 -3.0 -3.0 -1.6 -0.9 -0.4 ...-0.1
  - Structural fiscal balance: -1.9 -1.8 -1.9 -2.3 -1.1 -0.6 -0.3 ...-0.1
  - Gross debt: 96.3 96.8 97.1 97.0 95.4 93.0 90.2 ...75.9

- Unchanged Policy Scenario (Historical Spending Dynamics And No Reform) 3/4/
  - Real GDP growth: 1.2 1.6 1.6 1.5 1.9 1.9 1.7 ...1.3
  - Potential GDP growth: 1.0 1.1 1.3 1.3 1.3 1.3 1.3 ...1.4
  - Output gap: -2.2 -1.8 -1.5 -1.2 -0.6 0.0 0.3 ...0.0
  - Employment rate: 61.4 61.9 62.2 62.1 62.3 62.5 62.6 ...62.8
  - Unemployment rate: 10.0 9.5 9.1 9.0 8.7 8.6 8.5 ...8.7
  - Revenue: 53.0 53.1 53.0 53.0 53.0 53.0 53.0 ...53.0
  - Expenditure: 56.4 56.2 56.3 56.8 57.1 57.0 56.9 ...57.1
  - Fiscal balance: -3.4 -3.0 -3.3 -3.9 -4.1 -4.0 -3.9 ...-4.1
  - Structural fiscal balance: -1.9 -1.8 -2.4 -3.2 -3.8 -4.0 -4.2 ...-4.1
  - Gross debt: 96.3 96.8 97.4 98.4 99.2 99.9 100.5 ...103.9

- Notes from table footnotes (preserve exact text)
  - 4/ Growth projections reflect changes in the fiscal stance relative to the baseline. The revenue and spending multipliers are assumed to be 1.0 when the output gap is zero, and move with the cycle.
  - 2/ Full implementation of tax, labor, and product market reforms, broadly in line with staff advice. Relative to baseline, potential growth is higher by about 0.2 percent over the medium term. Growth benefits in the the first five years are broadly offset by a somehwat faster pace of fiscal consolidation, with flat real primary spending growth from 2019. This is underpinned by efficiency-oriented spending reforms that create room for  additional tax relief (and thus higher growth) in the outer years.
  - 3/ No major policy changes or structural reforms. Real spending growth at 1.2 percent per year, no tax changes, primary balance unchanged at around zero after 2020, and 150 bp higher risk premia.
  - 1/ Staff's preliminary projections reflecting information on policies and reforms specified as of July 2017. Real primary spending growth in 2019-22 (excluding CICE) at around 0.2 percent per year, planned tax cuts in 2018-22, constant structural deficit thereafter. Labor and tax reforms are projected to yield around 0.3 percentage points potential growth over the medium term, in roughly equal parts from higher potential employment and TFP growth.

### Spending Reform — The Key to Fiscal Sustainability (sections 16–19)
- Key findings
  - France has limited fiscal space under European rules; despite recovery, the ratio of public debt to GDP has continued to rise.
  - Structural fiscal adjustment has stalled since 2015; France remains subject to the Excessive Deficit Procedure.
  - Debt dynamics could become problematic in the event of a growth shock, with debt climbing to well above 100 percent of GDP.
  - While some fiscal space exists to respond to shocks, near-term room for maneuver is limited while the deficit remains above 3 percent of GDP.
- Fiscal strategy endorsed by staff
  - Gradual, expenditure-based fiscal consolidation planned by the government is generally appropriate.
  - Reducing the budget deficit to ½ percent of GDP by 2022 would help place public debt on a downward trajectory and create room for fiscal policy maneuver.
  - Central pillar: bringing down government spending by over 3 percentage points of GDP by 2022.
- Implementation requirements and risks
  - 2017 requires major efforts to bring the budget deficit down to 3 percent of GDP, including across-the-board spending freezes already in effect.
  - For 2018, measures of almost 1 percent of GDP will be needed to meet the 2018 deficit objective—an exceptional effort with significant implementation risks.
- Staff recommendations for designing and locking in deep spending reforms
  - Comprehensive spending reviews to identify efficiency gains and savings while maintaining adequate social protections.
  - Include local governments in reforms; the new pact with the state should include an agreed system of monitoring and incentives.

### Specific Spending Reform Opportunities (staff’s recent analysis)
- The relatively high wage bill could be reduced by shrinking the number of public employees in non-priority areas and reforming the salary system across the different levels and functions of the public sector.
- Restructuring and computerization of administrations could be supported by the €50 billion temporary investment plan announced by the president.
- Stepping up efforts to consolidate local government, especially the large number of small communes, could yield important economies of scale.
- Social transfers—notably housing aid—should be better targeted to the people most in need of support, including through enhanced means testing.
- Health spending could be made more efficient to curtail rising costs, including by reforming hospitals, enhancing the use of generics, and reviewing co-pays and deductibles.
- The envisaged reform of the pension system, which intends to unify different regimes and introduce a points-based or notional accounts system, should include incentives for later retirement.

### Authorities’ Views on Fiscal Strategy (section 20)
- Authorities determined to reduce the budget deficit to 3 percent of GDP this year and further thereafter; consolidation is overdue to rebuild fiscal space and meet European commitments.
- Defended frontloading several tax cuts as supporting domestic demand, while committing that consolidation will be expenditure based and not achieved by increasing the tax burden.
- Acknowledged that across-the-board freezes are unavoidable this year but insufficient for 2018 and beyond; structural spending reforms are necessary at all government levels.
- Welcomed staff suggestions and outlined targeted savings areas: the wage bill, housing aid, health care, public investment, unemployment insurance, and local government spending—while reinforcing the social safety net.
- On European fiscal governance, authorities saw merit in further integration, including a common budget and finance minister for the euro area, and reiterated preference for simplification of fiscal rules.

### Unlocking France’s Untapped Labor Market Potential (sections 21–27)
- Key labor market facts and challenges
  - Unemployment has hovered around 10 percent for years; has started to edge down as employment grows about around ¾ percent year-on-year.
  - Without fundamental reforms, unemployment expected to decline only slowly and converge to staff’s estimated NAIRU of just under 8 percent by 2022.
  - Long-term unemployment is well above pre-crisis levels; employment rates have stagnated and fall behind many European peers.
  - Structural rigidities include: labor agreements at the branch level for over 700 branches; long and uncertain judicial procedures around dismissals; generous eligibility for unemployment and welfare benefits; a minimum wage closer to the median wage than in peer countries with an automatic annual adjustment usually above inflation; and a sizeable labor tax wedge.
- Vulnerable groups (section 22)
  - Three socio-economic groups account for a large share of structural unemployment: the youth, the low-skilled, and immigrants from outside the EU.
  - Staff econometric analysis indicates significantly higher probability of being unemployed for these groups, controlling for other characteristics.
- Government first-stage reforms (section 23)
  - Major reform package (unveiled August 31) to be implemented by ordinances, including:
    - Greater flexibility for negotiations at the enterprise level (allowing opt outs from branch level agreements, broadening workplace referenda, removing barriers to firm-level agreements within SMEs).
    - Streamlining social dialogue, reducing judicial uncertainty around dismissals, and introducing a more flexible contract type for projects.
  - Expected to improve labor market functioning and flexibility over the medium term; near-term impact uncertain and may involve frictions mitigated by strengthening recovery.
- Unemployment insurance reform (section 24)
  - Plans to reform unemployment insurance into a broader social protection system, with greater state role, expanded coverage to the self-employed and those who leave voluntarily, and making employers who rely on short-term contracts internalize part of unemployment insurance costs.
  - Employment agencies expected to receive more resources and enforce sanctions more strictly for those who refuse job offers.
  - Staff emphasizes need to strengthen job search requirements and incentives through tighter eligibility and a more effective institutional support and control framework.
- Training and apprenticeship overhaul (section 25)
  - Broad reform envisaged to make training more transparent and accessible based on individual needs.
  - €15 billion earmarked from the €50 billion investment plan to train 1 million existing low-skilled unemployed workers and 1 million youth who are neither in school nor working.
  - Apprenticeship plans: develop pre-apprenticeships in all vocational schools, regular program reviews, and reorient resources from the apprenticeship tax toward the low-skilled.
  - Staff: design reforms to better link training and apprenticeship systems to labor market and individual needs.
- Labor tax wedge and payroll tax reforms (section 26)
  - Employer payroll contributions have been cut under the Pacte de Responsabilité et Solidarité (PRS) and the Crédit d’Impôt Compétitivité Emploi (CICE).
  - Government intends to convert the CICE into a permanent payroll tax cut; transition cost of CICE conversion amounts to around 1 percent of GDP and could be defrayed by phasing in the payroll tax cut over two years.
  - Plans to cut employee payroll contributions financed by an increase in the general income tax (CSG).
- Complementary wage policies (section 27)
  - Staff recommends enhancing firm-level flexibility in wage negotiations, limiting increases in the minimum wage to inflation, and giving a strong advisory role to the future National Productivity Board, including guidance on the link between wage dynamics and economic conditions.

### Authorities’ Views on Labor Reforms (section 28)
- Overarching philosophy: increase freedom for firms and employees while safeguarding social protections.
- Priorities: reforms to the labor code (immediate), then unemployment insurance (broadening scope and strengthening governance), and adapting professional training and apprenticeships to market and individual needs.
- Authorities agreed wage moderation is important and viewed an advisory role for the National Productivity Board as potentially helpful.

### Boosting External Competitiveness and Productivity (section 29)
- Key finding: France has lost external competitiveness over the past two decades, in both price and non-price dimensions.
- World market shares of French exports of goods and services have declined more steeply than many advanced economies, particularly in manufacturing and in high-tech and knowledge-intensive sectors.
- Contributing factors:
  - Trading partner growth: Relatively slow demand growth of France's trading partners, especially in the high-tech sector.
  - Exchange rate: The appreciation of the euro after its introduction affected competitiveness across the currency zone.
  - Note: The euro appreciated against the U.S. dollar in nominal terms by 63 percent between end-2000 and end-2009.

*Source: IMF staff report (cr17288), sections 15–29.*

### Box 1. Wage Setting and National Productivity Boards

### Box 1. Wage Setting and National Productivity Boards

### Role and design of National Productivity Boards (NPBs)
- The EU Council has recommended establishing National Productivity Boards (NPB) to analyze productivity and competitiveness developments and policy challenges.
- NPBs should:
  - carry out objective and fully independent high-quality economic and statistical analyses;
  - be granted functional autonomy vis-à-vis any public authority;
  - have procedures for experience and competency-based nomination of their members;
  - have appropriate access to information; and
  - have capacity to communicate publicly in a timely manner.

### Current national practices in wage formation (selected examples)
- France
  - The government annually sets the minimum wage (SMIC) based on a formula linked to a measure of inflation and purchasing power of workers’ wages.
  - An expert group provides an annual analysis and recommends to the government whether discretionary increases should be added to the formula.
- Belgium
  - Wages in the private sector grow through automatic wage indexation linked to inflation (excluding certain price categories).
  - Real conventional wage increases are negotiated biannually by social partners, after a maximum allowed growth is set by the Central Economic Council.
  - The maximum is based on expected wage developments in neighboring France, Germany and the Netherlands, plus a correction mechanism and safety margin to take account of estimation errors.
  - If social partners cannot reach agreement, the government can impose a maximum real conventional wage increase.
- Germany
  - There is no wage indexation.
  - Minimum wage adjustments are decided by the government upon recommendations by a commission of employer representatives, trade unions, as well as two non-voting academic advisors.
- United Kingdom
  - The government sets the minimum wage annually upon recommendation by a commission of employers, employees, and academics acting in an individual capacity.

### Connections to competitiveness and productivity (selected findings from surrounding analysis)
- Pre-crisis competitiveness gap versus Germany largely reflected differential wage growth, especially in services; however, given solid labor productivity growth, France's unit labor costs did not grow faster than in other euro area countries, as firms compressed margins to protect price competitiveness.
- The rapid rise in the relative price of non-tradables, largely driven by public and social services, may have contributed to declining competitiveness by increasing the cost of inputs to the export sector.
- Total factor productivity (TFP) growth has declined, with the slowdown more substantial in services than in manufacturing.

### Policy implications and recommendations (as reflected in the source)
- Ensure NPBs have independence, technical capacity, access to information, and public communication capacity to inform wage-setting and competitiveness debates.
- Consider wage-setting frameworks that balance indexation/automatic mechanisms and discretionary adjustments informed by independent analysis to preserve competitiveness.
- Address broader drivers of competitiveness (tax, product market, and structural reforms) alongside wage-setting institutions to support productivity and external performance.

*Source: Box 1. Wage Setting and National Productivity Boards, IMF staff (France country report content).*

### 41.      The envisaged labor market reforms, if well designed and implemented, should help

### cr17288 - 41.      The envisaged labor market reforms, if well designed and implemented, should help

### Labor market reforms: objectives and expected effects
- The government's reform strategy covers: steps to further reduce the labor tax wedge, make labor negotiations more flexible at the enterprise level, reduce judicial uncertainty around dismissals, reform the unemployment insurance system, and overhaul the professional training and apprenticeship systems.
- If the specific measures are well designed and implemented fully, these reforms would help:
  - bring down structural unemployment;
  - raise participation by lowering labor costs;
  - reduce market rigidities;
  - address skills mismatches;
  - better integrate vulnerable socio-economic groups.
- Reforms should be complemented by efforts to ensure continued wage moderation that reflects productivity developments, including by:
  - adjusting the minimum wage formula;
  - giving a strong advisory role to the future National Productivity Board.

### Tax and production taxation reforms (policy guidance)
- Planned tax changes:
  - reduction in the corporate tax rate to near the European average.
- Recommended complementarities:
  - combine corporate tax rate reduction with measures to reduce the bias in the tax code for debt financing;
  - remove inefficient exemptions;
  - eliminate disincentives to company growth.
- Capital taxation reform:
  - an opportunity to streamline the taxation of long-term savings.
- Production taxes:
  - production taxes should be reviewed.

### Financial sector: resilience and risks
- Post-crisis improvements:
  - banks have improved their financial buffers, profitability, and capitalization, and continue to provide adequate financing to the economy.
- Ongoing adjustments needed:
  - banks will need to adapt business models to the low interest rate environment, new technologies, and changing regulatory standards.
- Risks to monitor:
  - the rise in corporate debt bears watching closely, particularly in the event of a sharp increase in interest rates.

### Article IV schedule
- It is proposed that the next Article IV consultation take place on the standard 12-month cycle.

### Key macroeconomic findings and projections (selected)
- Real GDP (change in percent, 2013–2022): 0.6 0.9 1.1 1.2 1.6 1.8 1.9 1.9 1.9 1.8
- Unemployment rate (percent, 2013–2022): 10.3 10.3 10.4 10.0 9.5 9.0 8.7 8.3 8.0 7.8
- Nominal GDP (billions of euros, 2013–2022): 2,115 2,148 2,194 2,229 2,283 2,351 2,429 2,513 2,601 2,692
- General government balance (percent of GDP, 2013–2022): -4.0 -3.9 -3.6 -3.4 -3.0 -3.0 -3.2 -1.8 -1.2 -0.8
- General government gross debt (percent of GDP, 2013–2022): 92.3 94.9 95.6 96.3 96.8 97.0 97.0 95.6 93.6 91.2
- CPI (year average, 2013–2022): 1.0 0.6 0.1 0.3 1.2 1.3 1.6 1.7 1.7 1.8
- Current account (percent of GDP, 2013–2022): -0.9 -1.3 -0.4 -1.0 -1.1 -0.8 -0.5 -0.2 -0.1 -0.1
- Exports of goods (percent of GDP, 2013–2022): 20.7 20.4 21.0 20.7 21.0 20.6 20.9 21.3 21.8 22.1
- Imports of goods (percent of GDP, 2013–2022): -22.7 -22.3 -22.1 -21.9 -22.4 -21.7 -21.8 -22.0 -22.5 -22.8

### External position assessment and policy implications
- NIIP and external position:
  - NIIP deteriorated to around -20 percent of GDP by 2016Q3; deterioration driven mainly by increases in public sector liabilities.
  - Gross asset position stood at over 300 percent of GDP in 2016.
  - Public external debt accounts for about 19 percent of the gross liability position.
  - Assessment: NIIP negative but size and trajectory do not raise sustainability concerns; vulnerabilities exist due to external public debt and bank funding on the liability side.
- Current account background and outlook:
  - Current account deteriorated from a surplus of almost 4 percent of GDP in the late 1990s to an estimated deficit of 1.0 percent in 2016; cyclically-adjusted deficit estimated at 1.7 percent of GDP.
  - Projection: CA projected to deteriorate in 2017 to -1.1 percent of GDP due to higher oil prices, then gradually move into balance over the medium term as exports grow and the fiscal deficit narrows.
  - Assessment: staff assesses the 2016 cyclically-adjusted CA to be 1.8 to 3.8 percent of GDP below its norm; EBA model midpoint of assessed CA gap is -2.8 percent.
- Real exchange rate assessment:
  - REER (ULC and CPI bases) appreciated modestly in 2016 by about ½ percent compared to 2015.
  - Staff assessment: REER is 8–14 percent overvalued (taking into account EBA Level REER regression, CA model, ULC evidence).

### Policy recommendations to strengthen competitiveness and external position
- Continued wage moderation, especially of the minimum wage.
- Additional labor market reforms (as described above).
- Productivity-enhancing measures, including:
  - increasing competition in product markets;
  - further regulatory simplification.
- Gradual elimination of the fiscal deficit over the medium term to help correct the external imbalance and promote growth.

*Source: IMF staff report (France, selected tables and assessments contained in the provided PDF content).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Financial Conditions Indices (Annex II): main conclusions
- Financial conditions are captured by a combination of the equity market return, the risk-free rate, a sector-specific interest rate premium, and credit standards.
- Leading indicators and channels:
  - Financial conditions, especially stock market returns and credit spreads, are strong leading indicators and have an effect primarily on enterprise investment, and to a lesser extent on exports.
  - Households’ consumption is contemporaneously impacted by changes in financial conditions.
  - Equity market returns are the strongest leading indicator across GDP, investment, and consumption.
  - Interest rates, spreads, and credit standards provide additional early information on short-term economic prospects.
  - Bank credit growth is a lagging indicator—main FCI predicts economic activity and credit growth.

### Financial Conditions Indices (Annex II): methodology
- Two-step VAR approach to construct each country-specific FCI:
  - Select FCI components that best predict in a VAR each macroaggregate (GDP, consumption, investment, exports) based on statistical criteria and sign restrictions consistent with economic theory. Weights of financial variables in each FCI link directly to their impact on the growth rate of the targeted macro variable.
  - Aggregate variables into FCIs using weights derived from historical co-movements and cumulative impact on the targeted macro aggregates.
  - Use VARs to show each FCI improves predictions of real GDP, consumption, investment and real exports one to three quarters ahead, accounting for macro and price dynamics, oil prices, world growth, the real effective exchange rate, or change in unemployed labor force.
  - FCIs also improve monthly “now-cast” models of current-quarterly macro variables using higher-frequency information.

### Debt Sustainability Analysis (Annex III): headline projections
- Baseline projection summary:
  - Debt-to-GDP ratio projected to peak at 97 percent in 2019 and decline to 91.2 percent by 2022.
  - Debt-to-GDP in 2016: 96.3 percent (noted earlier as outcome of prior evolution).
  - Effective interest rate projected to decline further until 2018 before increasing to reach 2 percent in 2022.
  - Interest payments: historically low; 1.9 percent of GDP in 2016; projected to decline to 1.7 percent of GDP in 2018 and stabilize at 1.8 percent of GDP until 2022.
  - Gross financing needs peaked at 9 percent of GDP in 2016 due to debt maturity structure.
  - Part of debt increase reflects financial support to other Euro area countries: grew from 0.2 percent of GDP in 2010 to 3.2 percent of GDP in 2014; amounted to 3.0 percent of GDP in 2016.

### Debt Sustainability Analysis (Annex III): baseline macro and fiscal assumptions
- Macroeconomic assumptions:
  - 2016 growth: 1.2 percent.
  - 2017 growth: 1.6 percent.
  - Growth expected to rise to about 1.9 percent by the end of the projection period; output gap closed in 2021.
- Fiscal outlook:
  - Pace of structural adjustment slowed: 1 percentage point per year in 2011–13; 0.2 percentage point per year in 2014–16; projected to average 0.1 percent during 2017–22 in the baseline.
  - Primary balance above its debt-stabilizing level starting in 2020 and shifts to a surplus in 2021.
- Debt and financing needs:
  - Gross financing needs remain below the 20 percent threshold in baseline and all stress tests.

### Debt Sustainability Analysis (Annex III): realism and historical forecast errors
- Median forecast errors (2008–16):
  - Real GDP growth median forecast error: -0.70 percent (upward bias in staff projections).
  - Inflation median forecast bias: -0.24 percent (slight upward bias).
  - Primary balance median forecast error: -0.61 percent (staff projections somewhat optimistic).
- The debt-to-GDP ratio in 2016 is lower by 0.8 percentage point than forecast in the Staff report for the 2016 Article IV Consultation, mainly due to high emission premium and a downward revision of 2015 debt.

### Debt Sustainability Analysis (Annex III): feasibility and heat map
- Projected fiscal adjustment appears feasible:
  - Largest projected adjustment over any three years during the projection is 1.9 percent of GDP, below the 3 percent threshold.
  - Maximum average level of cyclically-adjusted primary deficit for any consecutive 3-year period reaches 0.5 percent of GDP, well below the 3.5 percent threshold.
- Heat map assessment:
  - Debt level risks deemed high because the 85 percent benchmark is breached under baseline and all stress scenarios.
  - Gross financing needs remain below the 20 percent benchmark under baseline and stress tests.
  - Public debt held by non-residents: 57.7 percent as of end-March 2017 (peak was 70.6 percent early 2010; end-2016 level 58.5 percent).

### Debt Sustainability Analysis (Annex III): main quantitative projections (selected series from table)
- Nominal gross public debt (in percent of GDP):
  - 2015: 79.9
  - 2016: 95.6
  - 2017: 96.3
  - 2018: 96.8
  - 2019: 97.0
  - 2020: 97.0
  - 2021: 95.6
  - 2022: 93.6
  - (column labeled cumulative) 91.2
- Public gross financing needs (in percent of GDP):
  - 2015: 8.8
  - 2016: 8.9
  - 2017: 9.0
  - 2018: 8.2
  - 2019: 8.9
  - 2020: 9.7
  - 2021: 7.5
  - 2022: 5.5
  - (additional column) 4.4
- Real GDP growth (in percent):
  - 2015: 0.9
  - 2016: 1.1
  - 2017: 1.2
  - 2018: 1.6
  - 2019: 1.8
  - 2020: 1.9
  - 2021: 1.9
  - 2022: 1.8
- Inflation (GDP deflator, in percent):
  - 2015: 1.3
  - 2016: 1.1
  - 2017: 0.4
  - 2018: 0.8
  - 2019: 1.2
  - 2020: 1.4
  - 2021: 1.5
  - 2022: 1.6
- Effective interest rate (in percent, defined as interest payments divided by debt stock at end previous year):
  - 2015: 3.4
  - 2016: 2.2
  - 2017: 2.0
  - 2018: 1.9
  - 2019: 1.8
  - 2020: 1.9
  - 2021: 1.9
  - 2022: 1.9
- Change in gross public sector debt (in percent of GDP):
  - 2015: 3.1
  - 2016: 0.7
  - 2017: 0.7
  - 2018: 0.5
  - 2019: 0.2
  - 2020: 0.0
  - 2021: -1.4
  - 2022: -2.0
  - cumulative to 2022: -2.4 (and -5.2 in final cumulative row)

### Debt Sustainability Analysis (Annex III): stress-test scenarios and outcomes
- Growth shock:
  - Scenario: real output growth rates lower by one standard deviation over 2018–19, i.e. 1.5 percentage points relative to baseline.
  - Assumptions: decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth) and interest rate increases 25 basis points for every 1 percent of GDP worsening of primary balance.
  - Outcome: debt-to-GDP would increase to 104 percent of GDP in 2019 and decline thereafter.
- Primary balance shock:
  - Scenario: cumulative 1.5 percent deterioration in the primary balance over 2018–22 (dual shock of lower revenues and rise in interest rate).
  - Outcome: debt-to-GDP would increase to 98.9 percent of GDP in 2019 and decline thereafter.
- Interest rate shock:
  - Scenario: 280 basis points increase in the cost of debt throughout the projection period.
  - Outcome in 2022: impact on gross financing needs is 0.9 percent of GDP and 2.1 percent of GDP for the debt-to-GDP ratio.
- Real exchange rate shock:
  - Scenario: 13 percent devaluation of the real exchange rate in 2018; impact on debt via inflation channel.
  - Outcome: debt-to-GDP marginally larger (0.3 percentage point at most) than baseline.
- Combined macro-fiscal shock:
  - Scenario: aggregates shocks to real growth, interest rate, exchange rate, and primary balance, avoiding double-counting.
  - Outcome: debt would reach 104.3 percent of GDP in 2019 and decline to 100.1 percent of GDP in 2022. Gross financing needs would peak at 12.5 percent of GDP in 2019 (below 20 percent benchmark).

### Alternative and scenario specifics (selected assumptions shown)
- Baseline underlying assumptions (excerpt):
  - Real GDP growth (2017–2022): 1.2; 1.6; 1.8; 1.9; 1.9; 1.8 (yearly as in table).
  - Inflation (2017–2022): 0.4; 0.8; 1.2; 1.4; 1.5; 1.6.
  - Primary balance (2017–2022): -1.7; -1.7; -1.4; -1.1; 0.1; -0.5; -0.9 (table rows show primary deficit and primary balance series).
- Alternative scenarios displayed: Historical scenario and Constant Primary Balance scenario with their respective parameterizations (table shows values for Real GDP growth, Inflation, Primary Balance, Effective interest rate under each scenario).

### Authorities’ view
- Authorities project a debt profile broadly similar to staff’s.
- Authorities do not consider the relatively large share of public debt held by non-residents to be a vulnerability, noting investor institutional and geographic diversification and that a significant share of non-resident holders are central banks.

*Source: IMF staff (Annex II and Annex III as presented in the supplied content).*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Policy and geopolitical uncertainties
- Relative Likelihood: High
- Impact on France if Realized:
  - Global spillovers from difficult-to-predict US policies, and uncertainty regarding post-Brexit negotiation could exacerbate external imbalances, and capital flow volatility.
  - France external position could deteriorate amidst worsened trade agreements within (notably vis-a-vis the UK) and outside the EU leading to lower growth and a slowdown of technological advances. Capital flows volatility could impact French banks which operate globally.
- Policy response:
  - Continue to support trade liberalization and FTAs, and contribute to smooth and predictable Brexit, while re-doubling efforts to secure the benefits of economic integration and cooperation across EU.

### Dislocation in labor flows, sharp rise in migrant flows, with negative global spillovers
- Relative Likelihood: High
- Impact on France if Realized:
  - Sharp rise in migrant flows, with negative global spillovers.
  - Potentially large medium-term fiscal impact depending on how fast migrants integrate into the workforce. Large flows can embolden populism and raise resistance to structural agenda.
- Policy response:
  - Adopt proactive policies to integrate migrants, including active labor market policies, strengthening language and skill training.

### Structurally weak growth in key advanced and emerging economies, notably China
- Relative Likelihood: Medium
- Impact on France if Realized:
  - Weak demand and persistently low inflation in advanced economies could take a toll through trade, and confidence channels.
  - Slower export growth and higher output gap can weaken public debt sustainability and private balance sheets.
- Policy response:
  - Accelerate structural reforms that buttress competitiveness and productivity to lift potential growth and reduce structural unemployment.

### Weak implementation of fiscal and structural policy commitments
- Relative Likelihood: Medium
- Impact on France if Realized:
  - Political resolve for reform may wane in the face of protracted low growth and renewed popular discontent.
  - Reversal of commitments could undermine investment and growth, adversely impact public debt dynamics, and eventually trigger adverse market reactions.
- Policy response:
  - Opt for a policy strategy that involves an early locking in of reforms and a conservative fiscal path and effective implementation of anti-corruption measures.

### Financial imbalances from protracted period of low interest rates
- Relative Likelihood: Medium
- Impact on France if Realized:
  - Corporate leveraging increases, while margins of life insurers and mortgage lenders get squeezed. Search for yield results in asset price bubbles.
  - Medium (over medium term): Large refinancing of mortgages poses medium-term risk for bank profitability, while impact on life insurers may build over time (mitigated by annual adjustment of guaranteed rates of return).
- Policy response:
  - Monitor lending standards and bank buffers and profitability.
  - Monitor life insurance sector and take policy action as needed.

### Unexpected financial regulatory changes
- Relative Likelihood: Medium
- Impact on France if Realized:
  - Risks from regulatory uncertainty (e.g. on floors to internal risk models, leverage ratio).
  - Medium (over medium term): Banks could be required to raise more capital, reducing their profitability and ability to provide credit to the economy.
- Policy response:
  - Promote further restructuring and cost cutting efforts by banks.

### Notes on the Risk Assessment Matrix (RAM)
- The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihoods are staff’s subjective assessment: "low" is meant to indicate a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability of 30 percent or more.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

*Source: Annex IV. Risk Assessment Matrix, cr17288 - Annex IV. Risk Assessment Matrix*

### 7.      Taken togeher, the analysis suggests that the vulnerabilities of key socio-economic

### 7.      Taken togeher, the analysis suggests that the vulnerabilities of key socio-economic groups can help partly explain why France has long experienced comparatively high structural unemployment

### Vulnerabilities, labor-market dynamics, and structural unemployment
- The relative labor market disadvantages of the young, the low-skiled, and immigrants from outside the EU are significant both before and after the crisis, exceeding those in countries with lower unemployment.
- Structural rigidities are particularly important for these groups.
- Hysteresis effects—specifically the observed correlation over time in the disadvantages of those who have experienced longer-term unemployment post crisis—may be an important factor explaining France’s high level of structural unemployment.
- Addressing these rigidities through well-designed and targeted reforms could help bring down structural unemployment by boosting employment rates among these vulnerable socio-economic groups.

### Empirical evidence and key statistics cited
- Probability of Exiting Unemployment to Employment: results based on a Heckman probit using INSEE survey data (marginal probabilities reported as percentage points; chart data originally shown for 2005-07 and 2012-14 by age, length of unemployment spell, training, and social benefits).
- Growth and macroeconomic outcomes:
  - Growth in 2016: 1.2 percent.
  - Carryover at the end of 2017Q2: + 1.4 percent.
  - Staff revised growth projections: 1.6 percent in 2017 and 1.8 percent in 2018.
  - Total private sector jobs created since 2014Q4: 525 000 private sector jobs.
- Public finances and fiscal targets:
  - Public deficit in 2016: 3.4 percent.
  - Public spending will be reduced by 3 points of GDP by 2022.
  - Overall tax revenues will be reduced by one point of GDP over five years.
  - Debt to GDP ratio targeted to decrease by 5 points by 2022.
  - Authorities aim at a public deficit at 0.5 percent of GDP before the next general elections.
  - The conversion of CICE into a permanent cut of employers’ social contributions: CICE currently represents around 1 point of GDP; planned conversion implies a one-off fiscal impact in 2019 and the rate of CICE will decrease from 7 percent to 6 percent the year of conversion to limit the temporary impact.
- Education and human capital:
  - Share of young professionals (25-34 years old) who completed upper secondary education: 44.7 percent.
- Public investment and training:
  - Investment plan total amount: 50 billion euros.
  - Amount dedicated to training for long term unemployed people and youth without degrees: 15 billion euros.
- Tax, welfare, and labor-cost measures:
  - Corporate income tax decrease from 33.3 percent to 25 percent by 2022.
  - A capital taxation rate set at unique rate: 30 percent.
  - Existing interest deduction allowance: 25 percent.
  - Employees’ social contributions to health insurance will be eliminated and compensated by an increase in the broad-base part of the personal income tax (the “CSG”).
- Labor market and financial sector indicators:
  - Ratio of non-performing loans to total loans in 2016: 3.9 percent.
  - Staff’s assessment of potential output in 2016: 1 percent (authorities diverge with staff on this assessment).

### Policy recommendations and reform measures highlighted
- Targeted labor-market policies:
  - Professional training for the young and low-skilled (explicit recommendation from the analysis).
  - Reforms of the minimum wage formula and unemployment insurance to improve labor-market outcomes for vulnerable groups.
- Labor market reform measures under way:
  - Use of “ordonnances” to implement labor law reforms; five ordonnances communicated to Parliament on August 31 and to enter into force by the end of September 2017.
  - Decentralization of collective bargaining to the firm level for aspects including part of compensation packages and working hours.
  - Merging different personnel representative bodies to simplify labor relations.
  - Setting a ceiling to termination benefits and reducing uncertainty related to layoffs and the period for disputing economic grounds for redundancy.
  - Conditioning the possibility to proceed to layoffs to economic difficulties at the national level rather than at the group level only.
- Tax and incentives reforms to support employment and investment:
  - Further decrease corporate income tax to 25 percent by 2022.
  - Introduce a single capital taxation rate of 30 percent.
  - Limit the wealth tax base to immovable assets.
  - Convert the tax credit on wage bill (“CICE”, around 1 point of GDP) into a permanent cut of employers’ social contributions by 2019, with transitional mitigation (CICE rate reduction from 7 percent to 6 percent the year of conversion).
  - Eliminate employees’ social contributions to health insurance and compensate via increased CSG to reduce the labor wedge.
  - Increase the in-work tax credit (“prime d’activité”) to sustain low-skilled workers’ remuneration while increasing incentives to work.
  - Phase out the housing tax over the next three years depending on revenue levels to support middle-income households’ purchasing power.
- Investment and human capital strengthening:
  - Allocate 15 billion euros of a 50 billion euros investment plan to training for long-term unemployed and youth without degrees.
  - Encourage digitalization, energy efficiency, and upmarket moves in agriculture and industrial production.
  - Create a dedicated Fund to support development and diffusion of innovative technologies.
- Fiscal consolidation and public spending containment:
  - Broad-based public spending containment and reduction measures to bring fiscal deficit durably below 3 percent of GDP.
  - Specific measures include reduction of the wage bill, reforms of housing allowances, digital reform of public administrations, restraint on local administration spending, and containment of health spending.
- Financial sector resilience and regulatory stance:
  - Authorities note strengthening of banks’ own funds, reduced reliance on wholesale funding, and adaptation to TLAC and MREL requirements through issuance of loss-absorbing liabilities.
  - Macroprudential authorities remain attentive and ready to take measures if needed.

### Scenarios and expected effects
- Expected labor-market and macro benefits from reforms:
  - Well-designed and targeted reforms—professional training for the young and low-skilled, reforms of the minimum wage formula and unemployment insurance—could be expected to help bring down structural unemployment by boosting employment rates among vulnerable socio-economic groups.
- Growth and current-account outlook:
  - Staff anticipates a gradual elimination of the current account deficit (which stood at 1 percent in 2016) by 2022, driven by an improvement of the trade balance due to planned reforms on competitiveness.

*Source: France — Staff Report for the 2017 Article IV Consultation — Informational Annex (selected extracts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17288.pdf_