## _wp1189 - References ## Source details **Canonical URL:** [_wp1189 - References](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1189.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1189.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1189.pdf.json) --- ### I. Introduction: Factors underlying the need for fiscal consolidation - Fiscal deficits averaged about 2 percent of GDP during the late 1970s and 1980s, and exceeded 3 percent of GDP on average in both the 1990s and 2000s. - Debt-to-GDP ratio rose from a post-war low of 20 percent of GDP in 1980 to more than 80 percent of GDP today. - From the early 1960s to the mid 1990s, the spending-to-GDP ratio increased from 35 to 55 percent. - In 1993 primary spending-to-potential GDP ratio was, at 51 percent, 11 percentage points higher than the average of G7 countries. - Revenues stabilized at around 50 percent of GDP in the mid 1990s after slowing down relative to spending. - Social transfers-to-GDP ratio doubled between the early 1960s and the mid 1990s, from 11½ to 23 percent. - Retirement spending reached 12.5 percent of GDP in 2010; health insurance spending amounts to over 11 percent of GDP, of which the social security system covers about three quarters. - Since the early 1980s, local governments became responsible for three quarters of public investment and employed substantially more civil servants: an additional 340 thousand hirings by local governments between 1995 and 2005. - Estimated elimination of about 30 thousand central government posts a year will take more than a decade to offset the additional 340 thousand hirings by local governments between 1995 and 2005. - Local governments fund about half of their revenue from the central government in the form of financial transfers and various grants. - The social security system includes 15 different administrations that manage four different regimes; the general regime covers about 80 percent of French citizens. - A rapidly increasing share of different taxes (VAT, excises on alcohol and tobacco, and several others) saw their proceeds fully or partially earmarked for social security since the early 1990s. ### II. Early attempts at fiscal adjustment (summary of episodes and outcomes) - Major consolidation episodes discussed: - "Plan Barre" of 1976 - "Virage de la Rigueur" of 1983 - First five-year budgetary plan of 1993–97 prepared for EMU accession - Excessive Deficit Procedure (EDP) of 2003–07 under the Stability and Growth Pact (SGP) - Plan Barre (1976): - Adopted in September 1976 as an austerity package to meet the 1976 budget objective and provide for drought-related outlays. - Included a temporary surcharge on personal and corporate income taxes and increases in registration and fuel taxes. - VAT rate cut from 20 percent to 17.6 percent in the 1977 budget alongside current and capital spending cuts. - General government deficit declined from 2.7 percent of GDP in 1975 to 0.9 percent of 1977. - In 1979 the deficit fell to 0.2 percent of GDP after revenue measures (increased taxation of oil products and of social security contributions). - Virage de la Rigueur (1982–84): - Late 1982 and early 1983 policy shift aimed at eliminating the trade deficit within two years and avoiding further fiscal deterioration. - Measures included increases in taxes on households and oil products, a new levy on personal incomes to finance social security, increases in public service charges, a compulsory savings scheme, and expenditure cuts. - External current account deficit fell from 2.1 percent of GDP in 1982 to virtually eliminated in 1984. - Inflation declined from 12 percent to 7.7 percent over the same period. - Fiscal deficit declined only slightly due to cyclical revenue losses and higher interest payments on growing public debt. ### III. The 1994 Guidance Law for the Public Finances: objectives and rationale - Adopted in 1994 as a five-year Guidance Law on Public Finance Control to implement the convergence program presented jointly by France and Germany to the European Council in November 1993. - Target: reduce the general government deficit from a projected 5½ percent of GDP in 1993 to 2 percent of GDP by 1997. - Adoption triggered by: - Increase in the central government deficit from 1.4 percent of GDP in 1990 to 3.2 percent of GDP in 1992. - Increase in public debt to 30 percent of GDP in 1992 and debt service burden to 16 percent of government revenue in 1992 (compared to 12 percent in 1990). - The Guidance Law: - Placed the central government budget in a multi-year framework for the first time. - Set stabilization and then reduction of public debt as the main fiscal objective. - Expected benefits listed in the law: - Creating fiscal space through debt service reduction. - Avoiding crowding out effects on private investment. - Allowing further declines in interest rates and eliminating the interest rate differential with Germany. - Smoothing accommodation of the projected increase in age-related spending from 2005 onward. - Putting France on a path toward meeting Maastricht criteria for European Monetary Union: overall budget deficit of less than 3 percent of GDP and public debt of less than 60 percent of GDP in 1997. ### Quantitative objectives of the 1994 Guidance Law - Central government deficit target: brought back to 2½ percent of GDP by 1997. - Overall spending: projected to remain unchanged in real terms (consistent with a 0.4 percent annual decline in real primary spending given expected increase in interest payments). - Revenues (including privatization receipts): projected to grow in real terms by 2.8 percent per year over 1995–97, on average, in line with real GDP. - Any additional revenues from better-than-expected economic developments: to be saved or used for a reduction of the tax burden. - Local government and social security accounts: projected to be balanced by 1997 to meet Maastricht fiscal deficit criteria (general government basis). - Budget process: future central government budgets to be set in a multi-year framework, with annual draft budget laws accompanied by five-year budgetary projections. - Accounting note: in line with French budgetary accounting rules, transfers to other government subsectors and to the EU are not included in the spending targets but are netted out from gross revenue. ### 1994–95: A mixed start — budgets, overruns, and policy choices - 1994 annual budget law aimed for a ½ percent of GDP decline in the central government deficit through spending restraint. - Projected spending reductions driven by: reduction in number of civil servants, wage moderation, substantial decline in investment spending, reduction in growth of transfers to local governments. - Privatization receipts projected at FF 50 billion (0.7 percent of GDP) and accounted as revenue. - 1994 outcome: deficit in line with budgetary objectives, but underlying spending significantly higher than planned; additional revenues were used for increased school allowances, social spending, labor market measures, and peace-keeping operations. - 1995: budget law provided for further deficit decline to 3½ percent of GDP (including privatization receipts), based mainly on expenditure restraint and excise increases; nevertheless, supplementary budgets (post-May 1995) added spending for employment, social housing, and SMEs. - Economic slowdown in the second half of 1995 weakened revenue collections; original fiscal deficit target met only after new measures (expenditure cuts and mobilization of additional nontax revenue) in a supplementary budget in November. ### 1996–97: Expenditure restraint and corrective measures - 1996 budget law and updated medium-term plan (covering 1996–99) committed to deficit reductions via expenditure restraint. - Updated plan aimed to reduce deficit from 4.1 percent of GDP (excluding privatization receipts) in 1995 to 3 percent in 1997 and 2 percent in 1999. - Adjustment strategy: keep spending constant in real terms and maintain tax-to-GDP ratio unchanged. - 1996: expenditures successfully restrained via declines in capital spending, a stability pact with local governments, freeze of public sector pay scale, and cuts in defense spending and social transfers. - 1997: cyclical revenue shortfall and difficulty keeping spending unchanged in nominal terms led to public finance audit projecting general government deficit at 3½–3¾ percent of GDP under unchanged policies; corrective plan adopted including an exceptional increase in the corporate income tax, abolition of preferential rate on long-term corporate capital gains, and additional expenditure cuts. ### Overall performance: targets versus outcomes (central government and general government) - Including privatization receipts, the central government fiscal deficit declined by 1.2 percent of GDP between 1993 and 1997 — some 0.8 percent of GDP less than initially planned. - Excluding privatization receipts, the deficit declined by 1.6 percent of GDP between 1993 and 1997. - Underperformance drivers: - Higher-than-planned increases in spending: primary spending about 0.7 percent of GDP and interest payments 0.4 percent of GDP. - Lower nontax revenue: 0.2 percent of GDP. - Lower-than-expected economic growth: contributed to an increase in the deficit-to-GDP ratio of 0.2 percent. - Offsetting factors: - Increase in central government tax revenue: 0.5 percent of GDP (reflecting both increased collections and a decline in the share redistributed to other government levels). - Debt outcome: debt-to-GDP ratio increased to 44 percent of GDP in 1997 (targeted 42 percent of GDP). - General government outcome: deficit under 3 percent of GDP and Maastricht fiscal deficit criterion met in 1997. - Contributing factors to meeting Maastricht criterion: - Initial plan left margin (aimed at reduction to 2 percent of GDP). - Local government accounts improved more than expected and registered a surplus of 0.2 percent of GDP in 1997. - Last-minute mobilization of one-off payments from France Telecom contributed additional revenue of about ½ percent of GDP. - Statistical changes (to align French accounting with European standards) further reduced the estimated deficit. - Social security reform adopted in 1996 contributed to a 0.6 percent of GDP reduction in its deficit, though social security accounts did not reach balance as envisaged. ### Institutional limits, lessons, and the evolution toward multi-year budgeting - The 1994 Guidance Law quantitative objectives were not legally binding; considerable discretion remained in fiscal policy implementation. - Absence of binding limits on spending growth allowed governments to increase spending when revenues exceeded projections. - The comparison of plan targets with outcomes highlights usefulness of medium-term budgeting but also institutional limits when objectives lack legal force and operational links to annual budgeting. - Historical context: post-war five-year economic plans were indicative and not binding; linkage to annual budgets was loose. - MTBF introduction (in context of SGP and 2001 Organic Budget Law) required annual MTBFs including: - Medium-term target for general government balance. - Annual path consistent with a ½ percent of GDP annual improvement in the structural balance (as long as medium-term target not met). - Key economic assumptions, description of measures envisaged, and sensitivity analysis. - Criticisms and weaknesses of early MTBFs (per a 2007 Inspection Générale des Finances report): - MTBFs prepared mainly to satisfy SGP requirements with no direct link to annual budget preparation. - MTBFs lacked operational targets enabling achievement of public finance objectives. - Spending norms applied mainly to the state budget (about 40 percent of general government spending). - Reforms in 2008 toward multi-year budgeting (implemented from the 2009 budget) introduced: - A “2+1” approach: expenditure ceilings set for three years but reviewed every two years. - Coverage limited to central government spending. - Breakdown of three-year ceilings into 32 sub-ceilings with an indicative ceiling on tax expenditures. - Contingency reserves amounting to 1 percent of central government spending by the third year. - Strengthened legal status: multi-year budgets presented to parliament for discussion and approval along with annual budget laws. ### Fiscal consolidation under the Stability and Growth Pact: 1998–2009 and the 2003–07 episode - France issued twelve annual Stability Programs (SPs) over 1998–2009; six envisaged reductions in the overall fiscal deficit of more than ½ percent of GDP per year in the context of Excessive Deficit Procedures (EDPs). - First significant consolidation episode: SPs 2003–07 aimed to reduce general government deficit below 3 percent of GDP and terminate EDPs. - The 2003 SP (submitted on December 11, 2003) was a key adjustment plan; fiscal deficit dipped only slightly below 3 percent of GDP by 2005 partly due to one-off receipts. - Fiscal adjustment strategy 2003–07: - Focused on expenditure control with revenue-to-GDP ratios targeted to remain broadly stable. - Key measures included a legally binding zero real growth rule for central government spending and significant health and pension reforms. - The 2003 SP set more ambitious spending targets than predecessors but envisaged only marginal reduction below Maastricht target, leaving vulnerability to adverse macro developments. - Outcomes (selected figures): - Actual central government balance: 2004 -3.6; 2005 -2.9; 2006 -2.3; 2007 -2.7; 2008 -3.3; 2009 -7.5. - SP 2003 projections: 2004 -3.6; 2005 -2.9; 2006 -2.2; 2007 -1.5. - France ultimately reduced the deficit below 3 percent of GDP during this episode, though SP targets were occasionally missed. - Evolution of fiscal rules: - Pre-1990s: nominal deficit target on a year-ahead basis. - From 1998: medium-term expenditure targets set at general government level as part of SPs; initial targets often missed due to inconsistency with annual budgets and spending slippages. - 2003: adoption of “zero volume growth” spending rule — central government expenditures (until 2008, excluding transfers to other government subsectors and the EU) to remain constant in real terms; effective in restraining central government spending but did not prevent slippages at local government and social security levels. - Government broadened scope of zero volume growth rule to include revenue transfers to local governments and the EU and earmarked revenue for quasi-fiscal activities; implementation in 2009 was mixed. - Focus on spending rules led to proliferation of tax exemptions and erosion of tax base; government recently committed to sizable reduction in excessive tax deductions and strict limits on new tax exemptions. ### Decomposition of program implementation (SP 2003 results) - Implementation decomposition components: - (i) cyclically-adjusted revenues and primary expenditures; - (ii) interest spending; and - (iii) cyclical balances. - Elasticities used for France: - Revenue elasticity of 1 and a primary expenditure elasticity of 0 (in line with recent estimates by the OECD and the European Commission). - Underperformance in the 2003 SP was associated entirely with structural shortfalls. - Selected SP 2003 outcomes (in percent of GDP, net of base effects unless stated): - The 2007 structural primary balance fell short of target by 2.5 percent of GDP (1.8 percent excluding base effects). - The overall balance underperformed by 1.2 percent of GDP (1.1 percent excluding base effects). - Table excerpts (selected entries, percent of GDP): - Revenues: 50.3 (2003p), 50.3 (2003a), 0.0 (Overperformance 2003a-2003p); 49.2 (2007p), 49.6 (2007a), 0.4 (Overperformance 2007a-2007p). - Cyclical: -0.3 (2003p), -0.3 (2003a), -0.1 (2003 overperformance); 0.1 (2007p), 0.5 (2007a), 0.5 (2007 overperformance). - Structural revenues: 50.6 (2003p), 50.6 (2003a), 0.1 (2003); 49.1 (2007p), 49.0 (2007a), 0.0 (2007). - Expenditures: 54.3 (2003p), 51.8 (2003a), -2.5 (2003); 53.3 (2007p), 52.3 (2007a), -1.0 (2007). - Primary: 51.2 (2003p), 48.7 (2003a), -2.5 (2003); 50.4 (2007p), 49.6 (2007a), -0.8 (2007). - Interest: 3.1 (2003p), 3.1 (2003a), 0.0 (2003); 2.8 (2007p), 2.7 (2007a), -0.1 (2007). - Overall balance: -4.0 (2003p), -1.5 (2003a), 2.5 (2003); -4.1 (2007p), -2.7 (2007a), 1.4 (2007). - Primary balance: -0.9 (2003p), 1.6 (2003a), 2.5 (2003); -1.3 (2007p), 0.0 (2007a), 1.2 (2007). - Structural primary balance: -0.6 (2003p), 1.9 (2003a), 2.6 (2003); -1.4 (2007p), -0.6 (2007a), 0.8 (2007). - Box 4 contains the formal algebraic method for the decomposition and references Fedelino, Ivanova, and Horton (2009) for cyclical adjustment methodology. ### Macroeconomic assumptions and their role - Typical SP scenarios: - Reference (low) scenario with real GDP growth of 2¼ - 2½ percent per year. - Favorable (high) scenario with real GDP growth of 3 percent per year. - Historical notes: - Reference scenario in the 2003 SP was close to the consensus forecast (CF); SPs of 2004 and 2005 were only marginally higher than CF. - Growth was somewhat underestimated in 2004 and overestimated in 2005; over 2006–07 projections were close to actual growth rates. - SPs of 2003–05 assumed negative output gaps, while actual output gaps were positive over 2004–07. - Optimistic biases in growth assumptions have been identified in a number of countries under the SGP. ### Spending overruns, offsets, and composition - Timing and offsets: - The deficit fell substantially short of target only in the last year (2007) of the program, but spending overruns occurred in preceding years. - Prior to 2007, spending overruns were offset by buoyant cyclical revenues, low debt service costs, and temporarily higher cyclically-adjusted revenues in 2005 and 2006. - One-off receipts and tax policy: - To meet the Council requirement of reducing the deficit under 3 percent of GDP in 2005, the government utilized one-off receipts from the electricity and gas industries in the amount of ½ percent of GDP. - A number of tax cuts were implemented in 2006 and 2007, most notably within the framework of the income tax reform of 2007. - Tax elasticities: - In 2005 and 2006, tax elasticities turned out somewhat higher than usual due to the buoyant economy and sizable one-off receipts. - Spending dynamics: - The primary expenditure ratio was close to target (net of base effects) only in 2004, the first program year also covered by the concurrent budget law. ### Spending by levels of government - Aggregate pattern: - Spending overruns at the general government level were the main obstacle to successful consolidation under the 2003–07 EDP. - Real spending growth of the general government exceeded SP targets but remained close to or even dipped below real GDP growth from 2004 to 2007. - Shares of expenditure during 2003–07: - Central government (CG) spending: close to 40 percent of general government (GG) expenditure. - Social security (SS) spending: close to 40 percent of GG expenditure. - Local government (LG) spending: 20 percent of GG expenditure. - Contribution to overruns: - Local governments and social security administrations both spent in excess of their respective targets; overruns by local governments were especially large. - Because local governments' share in GG expenditure was lower than social security's, their overruns accounted for broadly similar shares of total GG overspending over the SPs of 2003, 2004, and 2005, on average. - Spending restraint by the central government helped compensate a portion of these overruns, though inter-governmental transfers complicate comparisons. - Central government: - Bound by a zero real spending growth rule and managed to slow down and eventually reduce spending in real terms. - The rule is set in budgetary accounting terms, which exclude the bulk of transfers to local governments that are part of central government spending in national accounting terms. - Transfers to other levels of government account for over 20 percent of central government spending and reflect, in part, transfers of responsibility from the central government to other administrations. - Local governments: - Local government spending grew rapidly and always exceeded SP targets during 2003–07. - Composition of local spending: approximately half operating expenditures, a quarter transfers, and a quarter investment. - Golden rule: local governments must fund operating expenditures out of their own revenue, about half of which comes from the central government in the form of financial transfers and various grants. - Social security: - Social security spending frequently overshot SP targets. - Composition of social security spending: about half pensions, a third healthcare, the rest unemployment, family, and housing support. - The healthcare branch was in chronic deficits during the past decade; the retirement branch moved into deficit over the last five years. - Overruns also associated with unemployment support. ### Concluding remarks and policy lessons - Historical assessment: - Reviewed early consolidation attempts (1970s and 1980s), the 1994–97 episode that enabled meeting Maastricht criteria, and the 2003–07 consolidation under the corrective arm of the EDP. - The 2003–07 consolidation succeeded in terminating the excessive deficit procedure, but absence of binding constraints on local governments and social security administrations hindered implementation. - Lessons and recommendations: - Binding constraints help focus policymakers’ attention and justify actions to the public. In successful episodes, authorities were prepared to do what it took to meet Maastricht criteria or exit excessive deficit procedures. The recent introduction of multi-year budgeting bodes well for the future. - Fiscal consolidation is facilitated when spending restraint is shared and coordinated across all levels of government. Failures to meet objectives often resulted from higher-than-planned increases in spending by local governments and social security administrations even when central government progress occurred. - Appropriate binding deficit targets could help enforce budgetary discipline in good times. Under the SGP, the 3 percent of GDP requirement was treated as a target rather than a ceiling; this misplaced emphasis caused France to miss an opportunity to consolidate further in the boom years of 2005–07 and would have provided more fiscal room to deal with the recent global financial crisis. *Source: _wp1189 - References* ### References ............................................................................................................. ### _wp1189 - References ### I. Introduction: Factors underlying the need for fiscal consolidation - Fiscal deficits averaged about 2 percent of GDP during the late 1970s and 1980s, and exceeded 3 percent of GDP on average in both the 1990s and 2000s. - Debt-to-GDP ratio rose from a post-war low of 20 percent of GDP in 1980 to more than 80 percent of GDP today. - From the early 1960s to the mid 1990s, the spending-to-GDP ratio increased from 35 to 55 percent. - In 1993 primary spending-to-potential GDP ratio was, at 51 percent, 11 percentage points higher than the average of G7 countries. - Revenues stabilized at around 50 percent of GDP in the mid 1990s after slowing down relative to spending. - Social transfers-to-GDP ratio doubled between the early 1960s and the mid 1990s, from 11½ to 23 percent. - Retirement spending reached 12.5 percent of GDP in 2010; health insurance spending amounts to over 11 percent of GDP, of which the social security system covers about three quarters. - Since the early 1980s, local governments became responsible for three quarters of public investment and employed substantially more civil servants: an additional 340 thousand hirings by local governments between 1995 and 2005. - Estimated elimination of about 30 thousand central government posts a year will take more than a decade to offset the additional 340 thousand hirings by local governments between 1995 and 2005. - Local governments fund about half of their revenue from the central government in the form of financial transfers and various grants. - The social security system includes 15 different administrations that manage four different regimes; the general regime covers about 80 percent of French citizens. - A rapidly increasing share of different taxes (VAT, excises on alcohol and tobacco, and several others) saw their proceeds fully or partially earmarked for social security since the early 1990s. ### II. Early attempts at fiscal adjustment (summary of episodes and outcomes) - Major consolidation episodes discussed: - "Plan Barre" of 1976 - "Virage de la Rigueur" of 1983 - First five-year budgetary plan of 1993–97 prepared for EMU accession - Excessive Deficit Procedure (EDP) of 2003–07 under the Stability and Growth Pact (SGP) - Plan Barre (1976): - Adopted in September 1976 as an austerity package to meet the 1976 budget objective and provide for drought-related outlays. - Included a temporary surcharge on personal and corporate income taxes and increases in registration and fuel taxes. - VAT rate cut from 20 percent to 17.6 percent in the 1977 budget alongside current and capital spending cuts. - General government deficit declined from 2.7 percent of GDP in 1975 to 0.9 percent of 1977. - In 1979 the deficit fell to 0.2 percent of GDP after revenue measures (increased taxation of oil products and of social security contributions). - Virage de la Rigueur (1982–84): - Late 1982 and early 1983 policy shift aimed at eliminating the trade deficit within two years and avoiding further fiscal deterioration. - Measures included increases in taxes on households and oil products, a new levy on personal incomes to finance social security, increases in public service charges, a compulsory savings scheme, and expenditure cuts. - External current account deficit fell from 2.1 percent of GDP in 1982 to virtually eliminated in 1984. - Inflation declined from 12 percent to 7.7 percent over the same period. - Fiscal deficit declined only slightly due to cyclical revenue losses and higher interest payments on growing public debt. ### III. The 1994 Guidance Law for the Public Finances: objectives and rationale - Adopted in 1994 as a five-year Guidance Law on Public Finance Control to implement the convergence program presented jointly by France and Germany to the European Council in November 1993. - Target: reduce the general government deficit from a projected 5½ percent of GDP in 1993 to 2 percent of GDP by 1997. - Adoption triggered by: - Increase in the central government deficit from 1.4 percent of GDP in 1990 to 3.2 percent of GDP in 1992. - Increase in public debt to 30 percent of GDP in 1992 and debt service burden to 16 percent of government revenue in 1992 (compared to 12 percent in 1990). - The Guidance Law: - Placed the central government budget in a multi-year framework for the first time. - Set stabilization and then reduction of public debt as the main fiscal objective. - Expected benefits listed in the law: - Creating fiscal space through debt service reduction. - Avoiding crowding out effects on private investment. - Allowing further declines in interest rates and eliminating the interest rate differential with Germany. - Smoothing accommodation of the projected increase in age-related spending from 2005 onward. - Putting France on a path toward meeting Maastricht criteria for European Monetary Union: overall budget deficit of less than 3 percent of GDP and public debt of less than 60 percent of GDP in 1997. *Source: _wp1189 - References* ### 15. To help meet its overarching goal, the 1994 Guidance Law set a number of ### _wp1189 - 15. To help meet its overarching goal, the 1994 Guidance Law set a number of ### Quantitative objectives of the 1994 Guidance Law - Central government deficit target: brought back to 2½ percent of GDP by 1997. - Overall spending: projected to remain unchanged in real terms (consistent with a 0.4 percent annual decline in real primary spending given expected increase in interest payments). - Revenues (including privatization receipts): projected to grow in real terms by 2.8 percent per year over 1995–97, on average, in line with real GDP. - Any additional revenues from better-than-expected economic developments: to be saved or used for a reduction of the tax burden. - Local government and social security accounts: projected to be balanced by 1997 to meet Maastricht fiscal deficit criteria (general government basis). - Budget process: future central government budgets to be set in a multi-year framework, with annual draft budget laws accompanied by five-year budgetary projections. - Accounting note: in line with French budgetary accounting rules, transfers to other government subsectors and to the EU are not included in the spending targets but are netted out from gross revenue. ### 1994–95: A mixed start — budgets, overruns, and policy choices - 1994 annual budget law aimed for a ½ percent of GDP decline in the central government deficit through spending restraint. - Projected spending reductions driven by: reduction in number of civil servants, wage moderation, substantial decline in investment spending, reduction in growth of transfers to local governments. - Privatization receipts projected at FF 50 billion (0.7 percent of GDP) and accounted as revenue. - 1994 outcome: deficit in line with budgetary objectives, but underlying spending significantly higher than planned; additional revenues were used for increased school allowances, social spending, labor market measures, and peace-keeping operations. - 1995: budget law provided for further deficit decline to 3½ percent of GDP (including privatization receipts), based mainly on expenditure restraint and excise increases; nevertheless, supplementary budgets (post-May 1995) added spending for employment, social housing, and SMEs. - Economic slowdown in the second half of 1995 weakened revenue collections; original fiscal deficit target met only after new measures (expenditure cuts and mobilization of additional nontax revenue) in a supplementary budget in November. ### 1996–97: Expenditure restraint and corrective measures - 1996 budget law and updated medium-term plan (covering 1996–99) committed to deficit reductions via expenditure restraint. - Updated plan aimed to reduce deficit from 4.1 percent of GDP (excluding privatization receipts) in 1995 to 3 percent in 1997 and 2 percent in 1999. - Adjustment strategy: keep spending constant in real terms and maintain tax-to-GDP ratio unchanged. - 1996: expenditures successfully restrained via declines in capital spending, a stability pact with local governments, freeze of public sector pay scale, and cuts in defense spending and social transfers. - 1997: cyclical revenue shortfall and difficulty keeping spending unchanged in nominal terms led to public finance audit projecting general government deficit at 3½–3¾ percent of GDP under unchanged policies; corrective plan adopted including an exceptional increase in the corporate income tax, abolition of preferential rate on long-term corporate capital gains, and additional expenditure cuts. ### Overall performance: targets versus outcomes (central government and general government) - Including privatization receipts, the central government fiscal deficit declined by 1.2 percent of GDP between 1993 and 1997 — some 0.8 percent of GDP less than initially planned. - Excluding privatization receipts, the deficit declined by 1.6 percent of GDP between 1993 and 1997. - Underperformance drivers: - Higher-than-planned increases in spending: primary spending about 0.7 percent of GDP and interest payments 0.4 percent of GDP. - Lower nontax revenue: 0.2 percent of GDP. - Lower-than-expected economic growth: contributed to an increase in the deficit-to-GDP ratio of 0.2 percent. - Offsetting factors: - Increase in central government tax revenue: 0.5 percent of GDP (reflecting both increased collections and a decline in the share redistributed to other government levels). - Debt outcome: debt-to-GDP ratio increased to 44 percent of GDP in 1997 (targeted 42 percent of GDP). - General government outcome: deficit under 3 percent of GDP and Maastricht fiscal deficit criterion met in 1997. - Contributing factors to meeting Maastricht criterion: - Initial plan left margin (aimed at reduction to 2 percent of GDP). - Local government accounts improved more than expected and registered a surplus of 0.2 percent of GDP in 1997. - Last-minute mobilization of one-off payments from France Telecom contributed additional revenue of about ½ percent of GDP. - Statistical changes (to align French accounting with European standards) further reduced the estimated deficit. - Social security reform adopted in 1996 contributed to a 0.6 percent of GDP reduction in its deficit, though social security accounts did not reach balance as envisaged. ### Institutional limits, lessons, and the evolution toward multi-year budgeting - The 1994 Guidance Law quantitative objectives were not legally binding; considerable discretion remained in fiscal policy implementation. - Absence of binding limits on spending growth allowed governments to increase spending when revenues exceeded projections. - The comparison of plan targets with outcomes highlights usefulness of medium-term budgeting but also institutional limits when objectives lack legal force and operational links to annual budgeting. - Historical context: post-war five-year economic plans were indicative and not binding; linkage to annual budgets was loose. - MTBF introduction (in context of SGP and 2001 Organic Budget Law) required annual MTBFs including: - Medium-term target for general government balance. - Annual path consistent with a ½ percent of GDP annual improvement in the structural balance (as long as medium-term target not met). - Key economic assumptions, description of measures envisaged, and sensitivity analysis. - Criticisms and weaknesses of early MTBFs (per a 2007 Inspection Générale des Finances report): - MTBFs prepared mainly to satisfy SGP requirements with no direct link to annual budget preparation. - MTBFs lacked operational targets enabling achievement of public finance objectives. - Spending norms applied mainly to the state budget (about 40 percent of general government spending). - Reforms in 2008 toward multi-year budgeting (implemented from the 2009 budget) introduced: - A “2+1” approach: expenditure ceilings set for three years but reviewed every two years. - Coverage limited to central government spending. - Breakdown of three-year ceilings into 32 sub-ceilings with an indicative ceiling on tax expenditures. - Contingency reserves amounting to 1 percent of central government spending by the third year. - Strengthened legal status: multi-year budgets presented to parliament for discussion and approval along with annual budget laws. ### Fiscal consolidation under the Stability and Growth Pact: 1998–2009 and the 2003–07 episode - France issued twelve annual Stability Programs (SPs) over 1998–2009; six envisaged reductions in the overall fiscal deficit of more than ½ percent of GDP per year in the context of Excessive Deficit Procedures (EDPs). - First significant consolidation episode: SPs 2003–07 aimed to reduce general government deficit below 3 percent of GDP and terminate EDPs. - The 2003 SP (submitted on December 11, 2003) was a key adjustment plan; fiscal deficit dipped only slightly below 3 percent of GDP by 2005 partly due to one-off receipts. - Fiscal adjustment strategy 2003–07: - Focused on expenditure control with revenue-to-GDP ratios targeted to remain broadly stable. - Key measures included a legally binding zero real growth rule for central government spending and significant health and pension reforms. - The 2003 SP set more ambitious spending targets than predecessors but envisaged only marginal reduction below Maastricht target, leaving vulnerability to adverse macro developments. - Outcomes (selected figures): - Table 3 excerpt (in percent of GDP): Actual central government balance: 2004 -3.6; 2005 -2.9; 2006 -2.3; 2007 -2.7; 2008 -3.3; 2009 -7.5. - SP 2003 projections: 2004 -3.6; 2005 -2.9; 2006 -2.2; 2007 -1.5. - Subsequent SPs adjusted targets for outer years; SP targets were occasionally missed but France ultimately reduced the deficit below 3 percent of GDP during this episode. - Evolution of fiscal rules (Box 3): - Pre-1990s: nominal deficit target on a year-ahead basis. - From 1998: medium-term expenditure targets set at general government level as part of SPs; initial targets often missed due to inconsistency with annual budgets and spending slippages. - 2003: adoption of “zero volume growth” spending rule — central government expenditures (until 2008, excluding transfers to other government subsectors and the EU) to remain constant in real terms; effective in restraining central government spending but did not prevent slippages at local government and social security levels. - Government broadened scope of zero volume growth rule to include revenue transfers to local governments and the EU and earmarked revenue for quasi-fiscal activities; implementation in 2009 was mixed. - Focus on spending rules led to proliferation of tax exemptions and erosion of tax base; government recently committed to sizable reduction in excessive tax deductions and strict limits on new tax exemptions. *Source: _wp1189 - 15. To help meet its overarching goal, the 1994 Guidance Law set a number of* ### 28. Spending overruns were partly offset by favorable economic developments and ### 28. Spending overruns were partly offset by favorable economic developments and ### Decomposition of program implementation - Implementation relative to SP targets is decomposed into: - (i) cyclically-adjusted revenues and primary expenditures; - (ii) interest spending; and - (iii) cyclical balances (Box 4). - For France, cyclically-adjusted revenues and primary expenditures use a revenue elasticity of 1 and a primary expenditure elasticity of 0, in line with recent estimates by the OECD and the European Commission. - The decomposition shows that underperformance in the 2003 SP was associated entirely with structural shortfalls. - Specific outcomes (Table 4, Stability Program 2003, in percent of GDP, net of base effects unless stated): - The 2007 structural primary balance fell short of target by 2.5 percent of GDP (1.8 percent excluding base effects). - The overall balance underperformed by 1.2 percent of GDP (1.1 percent excluding base effects), reflecting overperformance of cyclical revenues and interest expenditures owing to strong growth and low interest rates during the program period. - Selected table entries (France: General Government Targets and Outcomes, SP 2003, in percent of GDP): - Revenues: 50.3 (2003p), 50.3 (2003a), 0.0 (Overperformance 2003a-2003p); 49.2 (2007p), 49.6 (2007a), 0.4 (Overperformance 2007a-2007p) - Cyclical: -0.3 (2003p), -0.3 (2003a), -0.1 (2003 overperformance); 0.1 (2007p), 0.5 (2007a), 0.5 (2007 overperformance) - Structural revenues: 50.6 (2003p), 50.6 (2003a), 0.1 (2003); 49.1 (2007p), 49.0 (2007a), 0.0 (2007) - Expenditures: 54.3 (2003p), 51.8 (2003a), -2.5 (2003); 53.3 (2007p), 52.3 (2007a), -1.0 (2007) - Primary: 51.2 (2003p), 48.7 (2003a), -2.5 (2003); 50.4 (2007p), 49.6 (2007a), -0.8 (2007) - Interest: 3.1 (2003p), 3.1 (2003a), 0.0 (2003); 2.8 (2007p), 2.7 (2007a), -0.1 (2007) - Overall balance: -4.0 (2003p), -1.5 (2003a), 2.5 (2003); -4.1 (2007p), -2.7 (2007a), 1.4 (2007) - Primary balance: -0.9 (2003p), 1.6 (2003a), 2.5 (2003); -1.3 (2007p), 0.0 (2007a), 1.2 (2007) - Structural primary balance: -0.6 (2003p), 1.9 (2003a), 2.6 (2003); -1.4 (2007p), -0.6 (2007a), 0.8 (2007) - Box 4 provides the formal algebraic method for the decomposition and references Fedelino, Ivanova, and Horton (2009) for the cyclical adjustment methodology. ### Macroeconomic assumptions and their role (Box 5) - French SPs typically included: - a cautious, or low, reference scenario with real GDP growth of 2¼ - 2½ percent per year; - a favorable, or high, scenario with real GDP growth of 3 percent per year. - Historical comparisons: - Reference scenario in the 2003 SP was close to the consensus forecast (CF); SPs of 2004 and 2005 were only marginally higher than CF. - Growth was somewhat underestimated in 2004 and overestimated in 2005; over 2006–07 projections were close to actual growth rates. - Although the 2003–07 consolidation did not rely on very conservative growth assumptions, it benefited from the favorable economic environment: SPs of 2003–05 assumed negative output gaps, while actual output gaps were positive over 2004–07. - Note on optimistic biases: Optimistic biases in growth assumptions have been identified in a number of countries under the SGP (Jonung and Larch, 2004, and Strauch, Hallerberg, and von Hagen, 2004). ### Spending overruns, offsets, and composition - Timing and offsets: - The deficit fell substantially short of target only in the last year (2007) of the program, but spending overruns occurred in preceding years. - Prior to 2007, spending overruns were offset by buoyant cyclical revenues, low debt service costs, and temporarily higher cyclically-adjusted revenues in 2005 and 2006. - One-off receipts and tax policy: - To meet the Council requirement of reducing the deficit under 3 percent of GDP in 2005, the government utilized one-off receipts from the electricity and gas industries in the amount of ½ percent of GDP. - A number of tax cuts were implemented in 2006 and 2007, most notably within the framework of the income tax reform of 2007. - Tax elasticities: - In 2005 and 2006, tax elasticities turned out somewhat higher than usual due to the buoyant economy and sizable one-off receipts. - Spending dynamics: - The primary expenditure ratio was close to target (net of base effects) only in 2004, the first program year also covered by the concurrent budget law. ### Spending by levels of government - Aggregate pattern: - Spending overruns at the general government level were the main obstacle to successful consolidation under the 2003–07 EDP. - The rate of growth of general government spending showed few signs of diminishing during the consolidation episode; real spending growth of the general government exceeded SP targets but remained close to or even dipped below real GDP growth from 2004 to 2007. - Shares of expenditure during 2003–07: - Central government (CG) spending: close to 40 percent of general government (GG) expenditure. - Social security (SS) spending: close to 40 percent of GG expenditure. - Local government (LG) spending: 20 percent of GG expenditure. - Contribution to overruns: - Local governments and social security administrations both spent in excess of their respective targets; overruns by local governments were especially large. - Because local governments' share in GG expenditure was lower than social security's, their overruns accounted for broadly similar shares of total GG overspending over the SPs of 2003, 2004, and 2005, on average. - Spending restraint by the central government helped compensate a portion of these overruns, though inter-governmental transfers complicate comparisons. - Central government: - Bound by a zero real spending growth rule and managed to slow down and eventually reduce spending in real terms. - The rule is set in budgetary accounting terms, which exclude the bulk of transfers to local governments that are part of central government spending in national accounting terms. - Transfers to other levels of government account for over 20 percent of central government spending and reflect, in part, transfers of responsibility from the central government to other administrations. - Local governments: - Local government spending grew rapidly and always exceeded SP targets during 2003–07. - Composition of local spending: approximately half operating expenditures, a quarter transfers, and a quarter investment. - Golden rule: local governments must fund operating expenditures out of their own revenue, about half of which comes from the central government in the form of financial transfers and various grants. - Social security: - Social security spending frequently overshot SP targets. - Composition of social security spending: about half pensions, a third healthcare, the rest unemployment, family, and housing support. - The healthcare branch was in chronic deficits during the past decade; the retirement branch moved into deficit over the last five years. - Overruns also associated with unemployment support. ### Concluding remarks and policy lessons - Historical assessment: - The study reviewed early consolidation attempts (1970s and 1980s), the 1994–97 episode that enabled meeting Maastricht criteria, and the 2003–07 consolidation under the corrective arm of the European Stability and Growth Pact (EDP). - The 2003–07 consolidation succeeded in terminating the excessive deficit procedure, but absence of binding constraints on local governments and social security administrations hindered implementation. - Lessons and recommendations: - Binding constraints help focus policymakers’ attention and justify actions to the public. In successful episodes, authorities were prepared to do what it took to meet Maastricht criteria or exit excessive deficit procedures. The recent introduction of multi-year budgeting bodes well for the future. - Fiscal consolidation is facilitated when spending restraint is shared and coordinated across all levels of government. Failures to meet objectives often resulted from higher-than-planned increases in spending by local governments and social security administrations even when central government progress occurred. - Appropriate binding deficit targets could help enforce budgetary discipline in good times. Under the SGP, the 3 percent of GDP requirement was treated as a target rather than a ceiling; this misplaced emphasis caused France to miss an opportunity to consolidate further in the boom years of 2005–07 and would have provided more fiscal room to deal with the recent global financial crisis. *Source: _wp1189 - 28. Spending overruns were partly offset by favorable economic developments and* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1189.pdf_