France: Staff Concluding Statement of the 2018 Article IV Mission

June 4, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The French economy is benefitting from a strong recovery, supported by favorable domestic and global conditions. Taking advantage of the positive outlook, policies should focus on addressing long-term challenges and building up resilience to shocks. Over the last year, France has made impressive progress in this regard, and the reform agenda ahead is equally ambitious. Looking forward, we encourage the authorities 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 

  1. France is benefitting from a broad-based recovery. Real GDP growth accelerated in 2017, reaching 2.3 percent, supported by past and ongoing domestic reforms, accommodative monetary policy conditions, and a favorable global environment. The economic recovery boosted fiscal revenues and helped reduce the fiscal deficit to 2.6 percent of GDP, below the EDP limit of 3 percent. While still high, unemployment has declined, on the heels of solid employment growth, and inflation and core inflation have risen, albeit from low levels. 
  1. The outlook is positive, although risks are tilted to the downside. This year and the next, growth is expected to remain robust, though less buoyant than in 2017, with strong investment, dynamic exports, and solid consumption. In the medium run, growth is expected to moderate and gradually converge toward its longer-term potential, while structural reforms will support productivity growth. However, both domestic and external downside risks remain. Domestically, growth will be weaker if the pace of reforms slows, or if reforms prove less effective than expected. Externally, increasing trade tensions, geopolitical uncertainty, or an erosion of confidence in the European project could negatively affect exports and growth, while a faster-than-expected normalization of interest rates could weigh on public and private balance sheets. 
  1. The authorities should continue to push forward the reform agenda and take advantage of the positive outlook to address remaining structural challenges and build up resilience to shocks. France’s economic performance has long been hampered by an inflexible labor market and high structural unemployment, weak competitiveness, and elevated public spending and debt. In recent years, also private sector debt has been on the rise. In its first year in office, the government has established an impressive track record of reforms aiming at addressing several of these challenges. The policy agenda ahead is equally ambitious and appropriately focused on: (i) tackling labor demand-supply mismatches and skill gaps that disadvantage specific groups, (ii) improving the business environment and supporting investment, (iii) reducing public spending and debt in the medium run, and (iv) addressing vulnerabilities related to private sector debt. The ongoing recovery provides a favorable window to press ahead with these reforms. 

Structural reforms 

  1. The labor market and tax reforms of last year are expected to boost investment, employment, and growth. The labor-market measures provide for greater flexibility and more streamlined wage negotiations at the enterprise level, while also reducing judicial uncertainty around dismissals. The tax-reform package has lowered the burden on labor income, cut the corporate income tax, and redesigned capital taxation. We expect these reforms to facilitate a better alignment of wages with productivity, encourage private investment, and boost competitiveness. 
  1. A second stage of labor-market reforms expected this summer should improve the labor-market prospects of low-skill workers. The reforms plan to improve the quality of the apprenticeship and professional-training systems, including by better matching training to firms’ needs, strengthening individuals’ rights, and enhancing governance. Concomitant reforms of the education system will reduce class size in primary schools in disadvantaged areas and overhaul access to higher education. These reforms should lower structural unemployment by better aligning the skills of workers with the qualification needed by businesses. They should also help integrate into the labor market vulnerable groups, such as the young and low-skilled. These groups will also benefit from recent measures to strengthen the social minima. 
  1. Complementary product- and service-market reforms will generate synergies and boost competitiveness and long-run growth. We welcome the government’s plan to restructure the public railway company and improve its financial viability as the sector opens up to competition. Building on previous reforms (e.g. the 2015 Macron law), the authorities are working on additional measures to support the business environment (Loi Pacte) and enhance innovation policy, including simplifying administrative burdens and allowing for more flexible compensation schemes linked to firm performance, which can help support investment, jobs, and growth. 
  1. With this ambitious pace of reforms France has now become a reform leader in Europe; still, reforms need to be implemented resolutely, monitored carefully, and reinforced as needed. Additional labor-market measures could include, for example, expanding firm-level flexibility in setting base wages, restricting the scope of the mechanism governing minimum wages, broadening the training and education reforms to include professional high-schools and pre-apprenticeship programs for disadvantaged groups, and re-examining the duration, level, and accumulation rate of unemployment benefits. The authorities could also consider further reducing restrictions and barriers to competition in regulated professions (e.g. pharmacies, etc.) to reduce costs and boost productivity.

Fiscal Policy 

  1. The government has appropriately ambitious fiscal objectives but has yet to fully specify how they will be achieved. Putting public debt on a firm downward path and meeting the government’s medium-term objective (MTO) 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. This is a sizable reduction, though not unprecedented in international comparison, and will require determined and sustained efforts across the public sector. In this context, calls for additional unfunded tax cuts should be resisted to avoid making the challenge more arduous. In the near term, measures initiated in this year’s budget are expected to be reinforced—including containing health spending, reducing reliance on subsidized jobs, rationalizing social-housing benefits, and containing local-government spending growth through a contractual approach. These efforts should broadly offset the costs of already legislated tax relief. Measures to reduce the deficit in the medium run, however, still need to be identified to a large extent. 
  1. Specifying spending reforms at all levels of government, starting with the 2019 budget, is key for the credibility of the strategy. It would also reduce uncertainty and facilitate planning. The needed spending reform should be an opportunity to reexamine how public services are provided and modernize and improve their quality. The expert-led Comité Action Publique 2022 will soon publish a report with recommendations in this regard. Our analysis points to the following areas 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;
  • As to local governments, in addition to current plans, merging small municipalities and eliminating overlaps between local and central government’s functions could generate further efficiency savings.

Financial Sector

  1. In the context of a protracted low interest environment and strong credit growth, the authorities should stand ready to deploy macroprudential tools if needed. The French banking sector has improved its resilience, including by strengthening its capital buffers. With financial conditions remaining loose, private indebtedness has been increasing, especially in parts of the corporate sector, which could give rise to imbalances once interest rates normalize. The macroprudential authorities have put in place limits on banks’ exposures to individual large indebted corporates, which appropriately target an area of potential vulnerability. Looking forward, they will need to monitor general credit developments closely and be ready to activate the countercyclical capital buffer if trends persist or accelerate. 

The mission thanks the authorities for their hospitality, cooperation, and willingness to engage in open and productive policy discussions.

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