France: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, June 4, 2018
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- Published: June 4, 2018
Mission summary and overarching policy priorities
- The French economy is benefitting from a strong recovery, supported by favorable domestic and global conditions.
- Over the last year, France has made impressive progress on reforms; the authorities are encouraged to pursue the following priorities:
- Finalize and implement the planned reforms of professional training and apprenticeship to reduce labor demand-supply mismatches, lower structural unemployment, and improve opportunities for disadvantaged groups. Stand ready to reinforce these reforms with additional measures if needed;
- Continue to pursue complementary product and service market reforms to open the railway sector to competition and reduce the administrative burden for firms, while taking steps to further liberalize regulated professions;
- Provide specific plans on how to reduce public spending while making it more efficient, and put public debt on a sustained downward path in the medium term;
- Stand ready to deploy macroprudential tools in a forward-looking way to prevent the build-up of imbalances as financial conditions remain loose.
Outlook and risks
- Key recent outcomes:
- Real GDP growth accelerated in 2017, reaching 2.3 percent.
- Fiscal deficit reduced to 2.6 percent of GDP, below the EDP limit of 3 percent.
- Short- and medium-term outlook:
- Growth this year and the next is expected to remain robust, though less buoyant than in 2017, supported by strong investment, dynamic exports, and solid consumption.
- In the medium run, growth is expected to moderate and gradually converge toward its longer-term potential, with structural reforms supporting productivity growth.
- Downside risks:
- Domestic: weaker growth if the pace of reforms slows or reforms prove less effective than expected.
- External: increasing trade tensions, geopolitical uncertainty, erosion of confidence in the European project, or a faster-than-expected normalization of interest rates could negatively affect exports, growth, and balance sheets.
- Policy implication:
- Authorities should continue the reform agenda and use the favorable window to address structural challenges and build resilience.
Structural reforms — labor market, education, and product markets
- Recent reform impacts and expected benefits:
- Labor-market and tax reforms of last year are expected to boost investment, employment, and growth by providing greater flexibility, streamlining wage negotiations at the enterprise level, reducing judicial uncertainty around dismissals, lowering the burden on labor income, cutting the corporate income tax, and redesigning capital taxation.
- A second stage of labor-market reforms expected this summer should improve prospects for low-skill workers by improving apprenticeship and professional-training systems, strengthening individuals’ rights, enhancing governance, reducing class size in primary schools in disadvantaged areas, and overhauling access to higher education.
- Complementary product- and service-market reforms include restructuring the public railway company as the sector opens to competition and measures to support the business environment (Loi Pacte) and enhance innovation policy.
- Suggested additional measures and areas for reinforcement:
- Expand firm-level flexibility in setting base wages and consider restricting the scope of the mechanism governing minimum wages.
- Broaden training and education reforms to include professional high-schools and pre-apprenticeship programs for disadvantaged groups.
- Re-examine the duration, level, and accumulation rate of unemployment benefits.
- Further reduce restrictions and barriers to competition in regulated professions (e.g. pharmacies) to reduce costs and boost productivity.
- Assessment:
- With this pace of reforms France has become a reform leader in Europe; reforms need resolute implementation, careful monitoring, and reinforcement as needed.
Fiscal policy — objectives, gaps, and reform areas
- Fiscal status and challenge:
- The government’s medium-term objective (MTO) and putting public debt on a firm downward path will require efforts to ensure a decline in the public spending to GDP ratio of around 4 percent (net of tax credits) in the medium-term.
- Near-term measures in this year’s budget are expected to be reinforced (containing health spending, reducing reliance on subsidized jobs, rationalizing social-housing benefits, containing local-government spending growth through a contractual approach) and should broadly offset already legislated tax relief. Measures to reduce the deficit in the medium run still need to be identified to a large extent.
- Key policy recommendations for credibility and planning:
- Specify spending reforms at all levels of government, starting with the 2019 budget.
- Use spending reform as an opportunity to reexamine public service delivery and modernize and improve quality.
- The expert-led Comité Action Publique 2022 will soon publish a report with recommendations in this regard.
- Areas highlighted for reform:
- Social benefits could be better targeted to those in need and simplified;
- Tax expenditures and subsidies to firms could be rationalized and made more efficient;
- Health spending could be contained without jeopardizing outcomes, including through further reliance on generics, hospital and primary care reform, and better integration of various levels of care;
- The pension reform under discussion, which intends to unify different regimes and simplify the system, could also consider progressively raising the effective retirement age in line with increasing longevity and closer to that of European peers;
- The planned reform of the public service, including enhanced use of fixed-term contracts, voluntary departure plans, and merit-based pay, could be complemented by additional targeted reductions in the number of civil servants through attrition;
- For local governments, merging small municipalities and eliminating overlaps between local and central government functions could generate further efficiency savings.
- Caution:
- Calls for additional unfunded tax cuts should be resisted to avoid making the fiscal challenge more arduous.
Financial sector and macroprudential stance
- Financial environment and vulnerabilities:
- Protracted low interest rates and strong credit growth; private indebtedness has been increasing, especially in parts of the corporate sector.
- The French banking sector has improved resilience, including by strengthening capital buffers.
- Macroprudential actions and readiness:
- Authorities have placed limits on banks’ exposures to individual large indebted corporates to target potential vulnerabilities.
- Macroprudential authorities should monitor general credit developments closely and be ready to activate the countercyclical capital buffer if trends persist or accelerate.
- Policy implication:
- Stand ready to deploy macroprudential tools in a forward-looking way to prevent build-up of imbalances as financial conditions remain loose.
Concluding note
- The mission thanks the authorities for their hospitality, cooperation, and willingness to engage in open and productive policy discussions.
France: Staff Concluding Statement of the 2018 Article IV Mission (June 4, 2018).