Exports

Partner country demand strengthened markedly in 1993, and remained robust throughout the first half of 1995, allowing exports to grow by almost 9 percent at an annual rate. During the second half of 1995, activity weakened in Germany and in some other trading partners in Europe, and exports fell off markedly—a development that also reflected shipment delays caused by the strikes in December 1995. Still, on average, real exports of goods and non-factor services increased by some 6 percent in 1995, while exports of goods increased by almost 8 percent. France was thus able to maintain its market share during 1995, which supports the view that the exchange rate was at a level consistent with adequate competitiveness in export markets. Developments during the first half of 1996 are difficult to interpret, due to a rebound from the strikes during the first quarter and large variations in quarterly working days. Overall, however, it appears that the growth of exports slowed somewhat compared with 1995.

Private consumption

Private consumption increased by only 1.8 percent in real terms in 1995, despite a robust increase in real disposable income (some 2.7 percent), implying a marked increase in the household saving rate to more than 14 percent (Chart 3). The high level of saving, especially during the second half of the year, reflected a sharp decline in consumer confidence, which in turn was brought on by worries about mounting unemployment, uncertainty about the direction of economic policy (especially regarding taxes, public expenditure, and the labor market), and the labor unrest late in the year. Most of the principal components of household disposable income grew at approximately the same rate in 1995 (Table A4). Taxes and social security contributions, as a share of disposable income, held broadly steady, while the share of social transfers declined slightly (Table A5).

View Full Size

FRANCE: Household Income and Expenditure

(In percent)

Citation: IMF Staff Country Reports 1997, 027; 10.5089/9781451813487.002.A001

Sources: INSEE, National Accounts and Banque de France, Bulletin.

• Download Figure
• Download figure as PowerPoint slide

During the first half of 1996, private consumption rose by 1.9 percent; although income increased at only a very modest pace. The marked decline in the household saving rate went hand-in-hand with a temporary improvement in consumer confidence. The growth of consumption during the first half of 1996 can be accounted for in part by a rebound from the strike-aggravated decline during the fourth quarter of 1995, and also by the decision of the government, early in the year, to lower the interest rate on passbook saving accounts by 1 percentage point to 3½ percent.¹

Gross fixed investment

A vigorous expansion in business investment slowed markedly during the first half of 1995, and came to a halt during the second half of the year, reflecting the deceleration of economic activity and exports. The slowdown in investment may also have resulted in part from the continuing high level of real short- and long-term interest rates, the still considerable slack in the economy, stagnant aggregate profit margins (the GDP deflator increased at the same rate as unit labor costs in 1995), and a slowdown in enterprise saving (Table A6).

Residential investment also weakened in the course of 1995. Contributing factors included high real interest rates, low consumer confidence, and the availability of a large stock of unoccupied office space for conversion into flats. Construction activity remained weak during the first half of 1995, despite the decline in interest rates and the introduction of temporary fiscal incentives permitting amortization of 80 percent of investment in new rental properties.

Stockbuilding

Stockbuilding, which had contributed substantially to growth in 1994, stabilized during the first half of 1995 and turned negative toward the end of the year. During the first half of 1996, there was substantial destocking, on the order of 1 percent of GDP. In addition to being another manifestation of the softness of the economy since mid-1995, these developments also reflected a sharp downturn in manufacturers’ expectations concerning future product prices as well as a substantial increase in their estimates of spare capacity. By mid-1996, stocks had declined to a historically low level (just over 5 weeks of output), but in surveys were still seen as excessive by a majority of producers.

Imports

Imports have tended to follow closely developments in total domestic demand (stockbuilding and investment have the highest import content). In 1995, imports of goods and non-factor services increased in real terms by 5.4 percent, compared with a real increase of 2.0 percent in total domestic demand, in line with the historical elasticity. Imports began to weaken sharply during the second half of 1995, reflecting destocking and a downturn in consumer purchases of automobiles and other goods. During the first half of 1996, imports came to a virtual standstill, as destocking accelerated sharply. Although the exchange rate fluctuated considerably in the course of 1995, it was little changed on average, and the effect of these variations on imports in 1995 and the first half of 1996 were relatively unimportant.

Saving investment balance

The share of gross investment in GDP was virtually unchanged in 1995 (Table A7). Consequently, the marked upturn in the current account surplus, to 1.4 percent of GDP, is accounted for principally by an increase in saving. As discussed earlier, household saving rose significantly, reflecting relatively weak private consumption (which in turn manifested itself in a weaker growth of imports). Government dissaving also declined somewhat, to 2.0 percent of GDP, reflecting the success of efforts to reduce the general government deficit.

Developments in 1995

Following the presidential elections, it became apparent that, on unchanged policies, the deficit of the state would exceed its target by a substantial margin (F 57 billion or 0.7 percent of GDP, divided about equally between expenditure overruns and a shortfall in revenue). Higher interest and social expenditure, as well as disappointing corporate tax and privatization receipts, accounted for most of the divergence. The supplementary budget announced by the government in June 1995 was intended to keep the deficit of the state, now excluding privatization receipts, in line with the initial target of F 322 billion (Table A14). New tax measures, estimated at F 33 billion, included an increase in the standard rate of VAT from 18.6 to 20.6 percent (effective August 1), and a 10 percent surcharge on corporate taxes and the wealth tax.⁸ The supplementary budget also envisaged a net increase in spending (relative to the June forecast) of F 15 billion. This reflected expenditure cuts totaling about F 17 billion (of which about half were in military spending) and about F 32 billion in new expenditure, of which F 11.4 billion was allocated to labor market measures, F 2.4 billion to housing, and F 0.5 billion to support the poor.

Following the adoption of the supplementary budget in July, the economy weakened further, and an additional shortfall in tax revenue, which ultimately amounted to about F 25 billion (1/3 percent of GDP), began to emerge. Corporate tax receipts were well below projections—reflecting substantial write-offs and provisioning (especially by banks) in the aftermath of the decline in real estate prices—as were receipts of personal income tax and VAT. Moreover, spending was higher than envisaged in the July supplementary budget, with a back-to-school allowance (F 4.6 billion), disaster relief for the Netherlands Antilles, and participation in security operations in the Balkans accounting for much of the difference.

To offset these slippages, which totaled F 40.3 billion (0.5 percent of GDP), the government in November announced a second supplementary budget for 1995 (Table 1). Measures included F 20 billion in expenditure cuts, notably F 3.5 billion in military procurement, F 1.1 billion in housing subsidies, and F 0.7 billion in cultural activities. The Government also received a payment of F 15 billion from the Caisse des Dépôts et Consignations, a government-controlled financial institution.⁹ These measures were sufficient to achieve the deficit target for 1995 (Tables A14 and A15).

Table 1.

France: Central Government - November Supplementary Budget for 1995

Source: Press reports; and data provided by the authorities.

Table 1.

France: Central Government - November Supplementary Budget for 1995

New Expenditure	16.2	Expenditure cuts	20.0
Revenue shortfall	24.1	Payment from the Caisse des Dépôts et Consignations	15.0
		Smaller EU budget contribution	2.0
		Miscellaneous	3.3
Total	40.3	Total	40.3

Source: Press reports; and data provided by the authorities.

View Table

Table 1.

France: Central Government - November Supplementary Budget for 1995

New Expenditure	16.2	Expenditure cuts	20.0
Revenue shortfall	24.1	Payment from the Caisse des Dépôts et Consignations	15.0
		Smaller EU budget contribution	2.0
		Miscellaneous	3.3
Total	40.3	Total	40.3

Source: Press reports; and data provided by the authorities.

Developments in 1996

The budget of the state for 1996, which was presented to parliament in September 1995, aimed to reduce the deficit to F 289.7 billion (3.6 percent of GDP). It envisaged considerable expenditure restraint, with overall outlays growing by only 1.7 percent (Table A14). As required by the five-year budget law, this increase was significantly below the anticipated rate of inflation (2.1 percent) and below the growth rate of nominal GDP (4.9 percent). The measures included a freeze on public sector wages and salaries following the last increase provided for in the multi-year pay agreement (1.4 percent in November 1995), with an increase in government employment of 0.15 percent. Even so, due to carryover from wage increases in 1995, the continuation of routine promotions, and other structural effects, personnel expenditure was budgeted to rise by 3.2 percent in 1996.

The budget also envisaged a 4.3 percent cut in capital spending, with a number of large construction projects coming to an end, and fewer new ones being undertaken. Furthermore, the government entered into a three-year “stability pact” (covering 1996–98) with the local authorities. Among other things, this agreement limits the growth of transfers to local governments to the rate of consumer price inflation (excluding tobacco).¹⁰ Social transfers were also to be reduced; in particular, the government eliminated its transfer to the unemployment insurance fond (F 5 billion in 1995), which the budget projected would continue to show a surplus in 1996.¹¹ Finally, while military expenditure was to increase slightly (by 0.5 percent) in nominal terms, it would decline in real terms, and would be well below what was foreseen in the most recent medium-term military spending plan.

The government anticipated a relatively small increase in tax receipts in the 1996 budget relative to the projection for real economic growth (2.8 percent). Excluding the effect of measures, tax receipts were expected to increase by 4.5 percent relative to the anticipated outturn in 1995 (against projected nominal GDP growth of 4.9 percent).¹² First, personal income tax revenue was projected to rise by 4.5 percent, again more slowly than household gross income, despite a reduction in exemptions for income from financial assets and life insurance saving. Second, given the uncertainty surrounding the earnings outlook for banks, insurance companies, and other enterprises, corporate tax receipts were seen as increasing by only 3 percent. Third, the underlying increase in the value added tax was seen to be limited by the relatively weak outlook for private consumption, which the authorities projected would rise by 2.3 percent at constant prices. Finally, as in 1995, the continuing substitution toward diesel automobiles, and more generally the tendency of consumers to purchase more economical vehicles, was expected to dampen the effect of the increase in the tax on petroleum products. Overall, as events were to show, these revenue projections were quite cautious.

Economic activity in late 1995 and early 1996 turned out to be substantially weaker than anticipated at the time the 1996 budget was drawn up, prompting the government to announce additional expenditure cuts amounting to F 20 billion (¼ percent of GDP) in Februaiy 1996.¹³ However, despite the relatively lower level of output and income, net tax receipts during the first half of 1996 increased by 6.4 percent compared with the first half of 1995, only somewhat below the annual rate of increase (7.6 percent) projected in the budget. Of this relatively small shortfall, a large portion reflects the poor performance of the VAT, which was adversely affected by the strike-induced downturn in private consumption in December of last year. Non-tax receipts were also below their level a year earlier, but the timing of these receipts is subject to considerable seasonal and discretionary variation and must be interpreted with care. Expenditure was substantially higher (by F 38.2 billion or ½ percent of GDP) than during the same period of the previous year. However, the government has cautioned that these expenditure developments cannot be extrapolated to the year as a whole. Notably, a one-time capital infusion for an ailing publicly controlled enterprise (GIAT) and large military capital expenditures fell into the first half of the year; no comparable outlays are expected during the second half. Moreover, the F 20 billion (¼ percent of GDP) expenditure freeze announced in February should help to contain spending during the second half. The cumulative deficit for the first six months amounted to F 226 billion, compared with a target of F 288 billion for the year as a whole (including the impact of advances to local governments which has a pronounced seasonal pattern and will improve by some F 50 billion by the end of the year). Data for the first seven months of the year continues to show the budget on tack. An improvement was registered in July, with cumulative expenditure below 7/12 of the annual budget total, and only a small shortfall in revenue.

The 1997 budget

Discussions on the 1997 budget of the state began in the spring, and the budget is to be presented to parliament at the beginning of October 1996.¹⁴ The draft submitted to the council of ministers in the second half of September envisages a deficit of F 284 billion (3.5 percent of GDP), about 0.4 percent of GDP higher than envisaged earlier, owing mainly to an income tax cut and relatively weak projections for tax revenue.¹⁵ Overall state budget expenditure, by contrast, is to be held constant in nominal terms at the level of the 1996 budget, in accordance with initial plans; this implies a decline in non-interest spending of about ½ percent.

General reforms

The most important general reform was an amendment of the constitution (ratified in early 1996) that enables parliament to vote each year a ceiling on the spending of the overall social security system, on the basis of a report from the government. Until now, the benefit policies of the social security system had been set mainly by the social partners.

Table 2.

France: Social Security: Régime Général

(Administrative basis)

Source: Data provided by the authorities; and staff calculations.

^1/Les comptes de la sécurité sociale, October 19,1995; and staff projections. Includes interest payments on accumulated debt.

^2/Announced November 15,1995.

^3/Interest payments will be made from 1996 on by a special fund for the amortization of the social security debt (CADES).

Table 2.

France: Social Security: Régime Général

(Administrative basis)

			1995	1996	1997
			(In percent of GDP)
Baseline financial balances 1/
	Health and accidents		-0.5	-0.4	-0.4
	Pensions		-0.2	-0.2	-0.2
	Family		-0.2	-0.1	-0.1
		Total	-0.8	-0.7	-0.7
Adjustment measures 2/
	Health and accidents		—	0.2	0.4
	Pensions		—	0.1	0.1
	Family		—	0.1	0.2
		Total	—	0.5	0.7
Balance following adjustment			-0.8	-0.2	—
	Excluding interest payments 3/		-0.8	-0.2	0.1

Source: Data provided by the authorities; and staff calculations.

^1/Les comptes de la sécurité sociale, October 19,1995; and staff projections. Includes interest payments on accumulated debt.

^2/Announced November 15,1995.

^3/Interest payments will be made from 1996 on by a special fund for the amortization of the social security debt (CADES).

View Table

Table 2.

France: Social Security: Régime Général

(Administrative basis)

			1995	1996	1997
			(In percent of GDP)
Baseline financial balances 1/
	Health and accidents		-0.5	-0.4	-0.4
	Pensions		-0.2	-0.2	-0.2
	Family		-0.2	-0.1	-0.1
		Total	-0.8	-0.7	-0.7
Adjustment measures 2/
	Health and accidents		—	0.2	0.4
	Pensions		—	0.1	0.1
	Family		—	0.1	0.2
		Total	—	0.5	0.7
Balance following adjustment			-0.8	-0.2	—
	Excluding interest payments 3/		-0.8	-0.2	0.1

Source: Data provided by the authorities; and staff calculations.

^1/Les comptes de la sécurité sociale, October 19,1995; and staff projections. Includes interest payments on accumulated debt.

^2/Announced November 15,1995.

^3/Interest payments will be made from 1996 on by a special fund for the amortization of the social security debt (CADES).

A second general reform was the creation, effective January 1, 1996, of a special fund (the Caisse d’amortissement de la dette sociale, CADES) to amortize, over thirteen years, a substantial portion of the accumulated debt of the social security system.¹⁷ The fund will be financed by a special income tax called the RDS (modeled on the generalized social contribution CSG but with a somewhat broader base).¹⁸ The rate of this tax will be set at 0.5 percent. It is expected to yield F 25 billion in 1996.

Third, the government intends to create a unified national health insurance system. Currently, most residents are covered under the régime général, but a large number of special occupational health insurance schemes are also in existence, and these complicated institutional arrangements are to be streamlined.

Specific measures

At the time the reform was announced, the government estimated that the total adjustment in the health care branch of the régime général would amount to F 17.8 billion in 1996 and F 30.5 billion in 1997. This adjustment was to be achieved by a virtual freeze in real terms of spending on physician services and hospitalization in 1996 and 1997 (later concretized as a nominal increase of just over 2 percent in 1996). Several steps have been taken to enforce the achievement of this objective.¹⁹ First, the adjustment of physicians’ rates of remuneration has been linked to respect of the expenditure targets; these rates of remuneration are to be lowered retroactively if the expenditure targets are exceeded. Second, insurance funds can impose sanctions (after due process) on physicians who prescribe unnecessary treatment.²⁰ Third, management of hospitals, which is now largely the responsibility of local governments, will be turned over to regional hospital agencies, which will be charged with reducing excess capacity. These agencies will also have greater flexibility in setting individual hospital budgets within an overall budget constraint; in the past, hospitals were typically awarded an across-the-board percentage increase in their budget regardless of performance.

Retired persons will in future be required to pay higher health insurance premiums; the contribution rate is being increased by 1.2 percentage points in 1996 and by a further 1.2 percentage points in 1997. This measure was expected to yield F 7.1 billion in 1996 and F 14.9 billion in 1997, almost half of the overall adjustment in the health care sector. Finally, a special contribution (F 2.5 billion) is being levied on the Pharmaceuticals industry in 1996.

The government envisaged an overall adjustment in the family branch of the régime général amounting to F 5.7 billion in 1996 and F 15.1 billion in 1997. Specific measures include (i) freezing family allowances in nominal terms in 1996 (yielding F 2.6 billion in 1996 and F 2.8 billion in 1997); (ii) raising employer contribution rates paid by the state and by public enterprises to the same level as paid by private enterprises (yielding about F 1.7 billion by 1997); and (iii) subjecting family allowances to income taxation beginning in 1997 (yielding about F 3 billion in 1997).

The government also intended to reduce the deficit of the pension branch of the régime général by F 11.7 billion in 1996 and F 11.8 billion in 1997. Among the steps envisaged to achieve this objective are (i) a freezing of pensions in real terms in 1996 (yielding less than F 1 billion); and (ii) a contribution of F 12.5 billion annually by the CADES to the pension fund of the régime général and thus indirectly financed by the RDS tax on incomes (it was initially intended that this contribution be paid by the Fonds de solidarity vieillesse, FSV).

Overview of recent developments

In international comparisons, two features of the French tax system stand out. The first is the low yield of income taxes. Revenues from income taxes were 7.2 percent of GDP in 1994, compared to an average of 10 percent of GDP for the seven large industrial countries. This appears to reflect a narrow tax base rather than low tax rates.²¹ Second, social security contributions are very high—at 21 percent of GDP compared to an average of 11 percent for the seven large industrial countries. Given the relatively generous tax treatment of returns from saving under the personal income tax, these GDP shares imply a very high overall tax burden on labor income in France.²²

Even so, some broadening of the income tax base has occurred in recent years through the introduction of a number of new income taxes, notably the CSG (Contribution Sociale Géneralisée) in 1991 and the RDS (Remboursement de la Dette Sociale) in February 1996. By 1995, revenues from the CSG reached one-third of revenues from the traditional progressive income tax (IRG, or Impôt sur le Revenu). At the same time, the emphasis on wage-based social security taxation has been reduced, through the introduction in 1993 of a system of partial exemptions from payment of employer social security contributions.²³ As a result of these changes in the tax code, revenues from IRG and CSG combined have grown since 1990, while some decrease in social security revenues has been recorded since 1993. Other recent changes to the tax code (motivated by the need to meet the 1995 fiscal targets) include a temporary increase in the normal rate of VAT (from 18.6 to 20.6 percent, effective August 1, 1995) and the introduction of a 10 percent temporary surcharge on the corporate income tax and the wealth tax.²⁴

The case for reform

A special Commission was appointed in early 1996 to identify problems with the tax system and make proposals for its reform.²⁵ The Commission concluded that it would be desirable to increase the elasticity of the French tax system; improve the horizontal equity of the tax system;²⁶ enhance the efficiency of the taxation of returns from savings, which is currently detrimental to equity financing; and reduce work disincentives linked to high marginal tax rates and the system of décôte (a tax reduction for low-income workers, which, however, has the perverse effect of doubling the progressivity of the tax for a certain range of modest incomes).

• The Commission proposed achieving these aims through:

• (1) The elimination of certain exemptions and deductions under the IRG; a reduction in tax rates, over five years, in all income tax brackets; the elimination of the system of décôte coupled with an increase in the income threshold above which the obligation to pay IRG applies; and the harmonization of the tax treatment of interest income, dividend income, and life insurance proceeds.

• (2) The partial replacement of employee health insurance contributions by a tax on a broader range on incomes, over a number of years.

• (3) Adjustments to the local business tax (the taxe professionelle) designed to avoid excessive disparities in tax rates among different local governments while stemming the increase in government transfers to local governments.

The principles underlying these proposals were endorsed by the Prime Minister. The specifics of the reform subsequently adopted by the government are to be set out and discussed in a forthcoming supplement to SM/96/242.

Personal income taxation

In order to ensure a more equal treatment of various sources of income, and hence to improve horizontal equity as well as increase the elasticity of the tax system, the Commission recommended the elimination of most exemptions and deductions, yielding about F 50 billion in savings (Table 3). The exemptions and deductions under the IRG comprise family allowances, educational allowances, maternity benefits, supplementary retirement income, the 10 percent deduction for retirees,²⁷ tailored deductions for professional expenses for 110 occupational groups,²⁸ the deduction for housing-loan interest, and exemptions for certain types of investment for new contracts. For an indication of the reforms proposed by the Commission, see Table 3.

Table 3.

France: Cost of Current Tax Expenditures

^*Tax expenditures that were proposed to be eliminated.

^1/A higher threshold for qualifying for abattement for those over 65 would be instituted in lieu of this measure.

Table 3.

France: Cost of Current Tax Expenditures

Family allowances *	5.0
Parental education allowance *	0.7
10 percent reduction for retirees 1/ *	13.0
Supplementary pensions for those with 3 children *	1.5
Maternity stipends *	1.2
Deduction for single, widowed and divorced
persons having raised a child *	9.0
Tailored deductions for 110 occupational groups *	2.5
Housing-loan interest *	7.4
Charitable contributions	1.5
Child care provided in the home to working parents	1.1
Long-term care for the elderly	0.2
Employment of domestic servants	5.0
“décôte” (or tax reduction) on taxable income in a certain range *	5.5
10 percent “abattement forfaitaire” for professionals *	…
Exemptions for certain types of investment (e.g., Loi Pons)	20.0
Defiscalized savings	…

^*Tax expenditures that were proposed to be eliminated.

^1/A higher threshold for qualifying for abattement for those over 65 would be instituted in lieu of this measure.

View Table

Table 3.

France: Cost of Current Tax Expenditures

Family allowances *	5.0
Parental education allowance *	0.7
10 percent reduction for retirees 1/ *	13.0
Supplementary pensions for those with 3 children *	1.5
Maternity stipends *	1.2
Deduction for single, widowed and divorced
persons having raised a child *	9.0
Tailored deductions for 110 occupational groups *	2.5
Housing-loan interest *	7.4
Charitable contributions	1.5
Child care provided in the home to working parents	1.1
Long-term care for the elderly	0.2
Employment of domestic servants	5.0
“décôte” (or tax reduction) on taxable income in a certain range *	5.5
10 percent “abattement forfaitaire” for professionals *	…
Exemptions for certain types of investment (e.g., Loi Pons)	20.0
Defiscalized savings	…

^*Tax expenditures that were proposed to be eliminated.

^1/A higher threshold for qualifying for abattement for those over 65 would be instituted in lieu of this measure.

In addition, the Commission recommended the incorporation in the tax schedule of the 20 percent “general” deduction²⁹ and the décôte. The Commission noted that the 20 percent “general” deduction (abattement forfeiture) covers 90 percent of the tax-base, so that its elimination and compensation through a 20 percent reduction in tax rates in all tax brackets would not be very costly, while having the advantages of simplifying the system, reducing the apparent marginal tax rate, and ensuring equal treatment of all incomes. In particular it would permit a reduction In taxation of dividends, whose treatment is asymmetric to that of interest (for which a final withholding option exists). The motivation for suppressing the system of décôte was to increase work incentives at low income levels. Under the current system, income tax (IRG) is not due if the tax assessment is less than 2,160 francs. For amounts between F 2,160 and 4,320, the final tax due is calculated as the difference between F 4,320 and the tax assessment. This implies that the progressivity of the tax system is doubled at low levels of income. As the suppression of the décôte by itself would reduce after-tax incomes of low-income earners, the Commission recommended (1) an increase in the income threshold for being subject to IRG (the tranche à taux zéro) from F 22,600 to F 54,950 and (2) a reduction in tax rates (see below).

Regarding the taxation of returns from savings, the Commission recommended the removal of certain fiscal incentives, notably for life insurance and other contractual savings, which have led to a more favorable treatment of returns from savings in France than abroad, while also distorting the choice of savings instrument to the detriment of equity financing.³⁰ In the case of liquid savings, the Commission recommended the removal of the exemption for interest income from pass-book savings (the comptes et livrets d’ épargne liquide) and the institution of a system of final withholding at a reduced rate for interest income on pass-book savings exceeding F 30,000 per liwet.

In order to increase the political acceptability of the removal of exemptions and deductions, as well as the shift to a universal health insurance contribution (see below), while also increasing incentives and compliance rates, the Commission recommended a reduction in tax rates for all income brackets, at a net budgetary cost of F 50 billion.^{31 32} The proposals envisaged cutting the top marginal rate to 40 percent (from the 45.4 percent implied by current rate of 56.8 combined with the 20 percent surcharge). This would cost F 4 billion, while having efficiency advantages, including from reduced taxation of dividends and capital gains.

Summary and outlook

The Commission’s proposals addressed several troublesome aspects of the French tax system, including the narrow bases of the IRG and health insurance contributions, the inefficient taxation of returns from savings, high marginal tax rates (including for low income workers), and the excessive burden placed on investment by local taxation. In its summary recommendations, the Commission leaves several issues for consideration at a later date. These include whether the current level of social benefits is compatible with preserving work incentives at low levels of income; the appropriate degree of support to families; the appropriate progressivity of the tax system; the reform of local taxation; and the optimal taxation of capital versus labor.

As regards the implementation of Commission’s proposals, political decisions have just begun to be taken. The Prime Minister outlined the broad lines of the government’s proposals in a speech on 5 September, 1996. It was announced that revenues from the IRG would be reduced by F 75 billion (or one quarter of IRG receipts) over 5 years, with F 25 billion in tax reductions scheduled for 1997. Income tax rates would be reduced in all brackets. The top marginal tax rate would initially be cut from 56.8 percent to 54 percent, falling eventually to 47 percent; the lowest rate would fall from 12 percent to 7 percent. A number of exemptions, including special tax deductions for professions, the 10 percent tax deduction for retired people, maternity benefits, and tax deductions for people with children who are no longer of school age or at university, would be removed gradually or trimmed, and the system of décôte eliminated. The net budgetary cost of these income tax reforms in 1997 would be F 25 billion. Health care contributions would be cut by 1.3 percentage points and financed by a 1 percentage point increase in the CSG (which would be deductible from IRG). At the same time, the CSG would be broadened to include certain forms of returns from savings, such as dividends and eventually income from life-insurance policies, which are currently exempt. On balance, therefore, the reforms of the income tax and social security financing would have a negative budgetary impact of F 18 billion in 1997.³⁹

Overview

Local government spending has grown considerably since the adoption of the 1982 decentralization law (Box 1); by 1995, it amounted to 10½ percent of GDP, compared with 8½ percent of GDP in the early 1980s (Table 4). Deficits have generally been small, reflecting continuous increases in local taxes, as well as growing transfers from the central government (Tables 5 and A18). Even so, debt amounting to about 9 percent of GDP had been accumulated by local government by the end of 1995. During the last two years, resistance to further tax increases has mounted,⁴⁰ while the expansion of state transfers has been slowed by the adoption (in 1996) of a “stability pact”.⁴¹ As a result, local governments have begun to practice greater expenditure restraint (Chart 7).

Table 4.

France: Local Government Finances

(In percent of GDP)

Source: INSEE, Rapport sur les comptes de la nation, various issues.

Table 4.

France: Local Government Finances

(In percent of GDP)

	1980	1982	1985	1990	1992	1995
Total Revenue	7.7	8.1	8.8	9.5	10.4	10.5
Expenditure	8.3	8.9	9.2	9.6	10.7	10.7
Deficit	0.6	0.8	0.4	0.1	0.3	0.2
Gross Debt	7.1	7.3	7.5	7.6	8.2	8.8

Source: INSEE, Rapport sur les comptes de la nation, various issues.

View Table

Table 4.

France: Local Government Finances

(In percent of GDP)

	1980	1982	1985	1990	1992	1995
Total Revenue	7.7	8.1	8.8	9.5	10.4	10.5
Expenditure	8.3	8.9	9.2	9.6	10.7	10.7
Deficit	0.6	0.8	0.4	0.1	0.3	0.2
Gross Debt	7.1	7.3	7.5	7.6	8.2	8.8

Source: INSEE, Rapport sur les comptes de la nation, various issues.

Table 5.

France: Local Government Receipts

(In percent of total revenue)

Source: DGCL.

Table 5.

France: Local Government Receipts

(In percent of total revenue)

	1980	1982	1985	1990	1992	1995
Direct taxes	40.6	41.6	41.7	38.4	39.6	40.3
Indirect taxes	12.4	11.8	11.7	16.3	16.6	16.3
Non-tax revenue	15.1	14.9	14.9	14.7	14.7	14.5
Current transfers	24.4	24.3	24.1	22.9	21.6	21.5
Capital transfers	7.5	7.4	7.6	7.7	7.5	7.4

Source: DGCL.

View Table

Table 5.

France: Local Government Receipts

(In percent of total revenue)

	1980	1982	1985	1990	1992	1995
Direct taxes	40.6	41.6	41.7	38.4	39.6	40.3
Indirect taxes	12.4	11.8	11.7	16.3	16.6	16.3
Non-tax revenue	15.1	14.9	14.9	14.7	14.7	14.5
Current transfers	24.4	24.3	24.1	22.9	21.6	21.5
Capital transfers	7.5	7.4	7.6	7.7	7.5	7.4

Source: DGCL.

View Full Size

FRANCE: Local Government Finance and Employment

Citation: IMF Staff Country Reports 1997, 027; 10.5089/9781451813487.002.A001

Source: Data provided by the authorities.

• Download Figure
• Download figure as PowerPoint slide

An increase in local government borrowing is not precluded by current institutional arrangements: local authorities in France face borrowing restrictions that are substantially less strict than those in many other European countries, and financial markets have been quite willing to extend credit. In the past, loans were often obtained from Crédit Local, which is a traditional lender to local authorities; more recently, commercial banks have begun to increase their exposure to these bodies. Disintermediation has also begun, with issues of paper often enhanced by insurance arrangements when ratings are below top investment grade.⁴²

Structure of revenue and expenditure

The principal sources of local revenue are direct taxes, indirect taxes, and transfers from the central government (Tables 6 and A18). Nearly two-fifths of the resources of local government are derived from the four direct taxes (occupancy tax, property taxes on buildings and land, and business tax). With relatively few exceptions (for example the capping of the local business tax by the state in order to ease the corporate tax burden), local authorities effectively set their own rates of taxation according to their budgetary needs.

Table 6.

France: Local Direct Taxes, 1994

Source: Crédit Local.

Table 6.

France: Local Direct Taxes, 1994

	Amount (In billion F)	Share (In percent of total)
Business (professionelle) tax	148.8	49.1
Occupancy (habitation) tax	60.3	19.9
Building (foncière sur PB) tax	85.7	28.3
Land (foncière sur PNB) tax	8.3	2.7
Total direct taxes	303.1	100.0

Source: Crédit Local.

View Table

Table 6.

France: Local Direct Taxes, 1994

	Amount (In billion F)	Share (In percent of total)
Business (professionelle) tax	148.8	49.1
Occupancy (habitation) tax	60.3	19.9
Building (foncière sur PB) tax	85.7	28.3
Land (foncière sur PNB) tax	8.3	2.7
Total direct taxes	303.1	100.0

Source: Crédit Local.

The business tax (taxe professionelle) levied on firms is by far the largest single source of tax revenue, accounting for about 45 percent of total local direct taxes; about one-fourth of the revenues from this tax are, however, payments made by the central government to offset a number of exemptions and reductions introduced over time.⁴³ Property taxes based on the rental value of dwellings and lands constitute the other main direct tax levied by local governments. Most direct tax rates have increased in the 1990s as their bases contracted. Indirect taxes include the motor vehicle tax, the inheritance tax, the utility tax, and other taxes linked to urban development (for example a tax related to density).

Transfers from the central government comprise operational financial transfers such as the DGF (dotation globale de fonctionnement), capital transfers such as the DGE (dotation globale d’équipemeni), financial transfers to compensate for various exemptions (such as the DGCTP - dotation globale de compensation pour la taxe professionelle), and matching grants. In 1994, the share of transfers in local government revenue amounted to some 20 percent. Many transfers are automatically indexed. In the case of compensations for tax changes, they take the tax revenue as their base. Despite recent attempts to unify these numerous transfers in a single block operating grant, the financial relationship between the state and the local authorities has grown increasingly complex, owing to exemptions, incentives, and cross-subsidies aimed at achieving a multitude of policy goals.

The main components of local expenditure are personnel and investment (Tables 7 and A18). Personnel expenditure represents about 40 percent of total outlays (the ratio is 50 percent for municipalities). Personnel spending has grown by close to 6 percent in 1990–95, reflecting significant new hiring, even though local governments were charged with no new functions during the period (Chart 7).⁴⁴ There appears to have been considerable duplication of activities. Capital spending has also increased quickly (by about 7 percent annually) since the mid-1980s, when local authorities became responsible for school buildings and transport infrastructure. Indeed, investment by local governments accounts for the bulk of total public investment in France (75 percent in 1994) and represent about 13 percent of total fixed investment in the economy. It has often been noted that there are incentives to over-invest at the local level, as swimming pools, sports facilities, youth entertainment centers, public hospitals, and so forth, are an important source of local employment (and political patronage).

Table 7.

France: Local Government Expenditure

(Real growth rate)

Source: INSEE.

Table 7.

France: Local Government Expenditure

(Real growth rate)

	1992	1993	1994	1995	Share in total (1995)
Total expenditure	4.4	1.7	2.6	3.9	100.0
Operating expenditure	4.7	3.3	3.4	5.7	52.7
Interest expenditure	3.6	2.9	-1.0	2.0	7.7
Non-interest current exp.	6.9	3.1	4.4	—	16.2
Capital expenditure	2.3	-3.2	-0.6	3.2	23.5

Source: INSEE.

View Table

Table 7.

France: Local Government Expenditure

(Real growth rate)

	1992	1993	1994	1995	Share in total (1995)
Total expenditure	4.4	1.7	2.6	3.9	100.0
Operating expenditure	4.7	3.3	3.4	5.7	52.7
Interest expenditure	3.6	2.9	-1.0	2.0	7.7
Non-interest current exp.	6.9	3.1	4.4	—	16.2
Capital expenditure	2.3	-3.2	-0.6	3.2	23.5

Source: INSEE.

Unskilled labor, the long-term unemployed, and the young

Policies to reduce the cost of low-skilled labor consist of both general and targeted social security tax reductions and subsidies, many of which were introduced by the Five-Year Law on Labor, Employment and Training of 1993.⁵⁶

Two important changes were made in the area of general social security tax reductions. First, the existing system of exemptions for family allowances was modified. Second, additional exemptions were introduced for health insurance contributions. Since 1993, employers have been exempt from payment of contributions for family allowances for wages up to a multiple of the minimum wage. The Five-Year Law envisaged that this multiple would be raised each year, so as to minimize the creation of poverty traps. Initially, this multiple was 1.1 times the minimum wage; it was raised to 1.2 times the minimum wage in January 1995.⁵⁷ Further exemptions covering employer contributions to health insurance (the so-called ristourne dégressive) were introduced in September 1995. Under this scheme, employer contributions are reduced for wages below 1.2 times the minimum wage, with the reduction declining as the wage increases.⁵⁸ This measure encourages part-time employment, as the monthly wage (rather than the hourly wage) establishes eligibility.

In October 1996, the exemptions for family allowances and health insurance are to be merged and the new threshold raised to 1.33 times the minimum wage. At the minimum wage, the reduction in labor costs will continue to be 12.4 percent of labor costs. The raising of the threshold is also expected to broaden the range of workers and industries able to benefit from social security tax reductions.

Important changes were also made in 1995 and 1996 to targeted social security tax reductions. Traditionally these measures comprise (1) temporary exemptions from social security contributions combined with subsidies targeted at the long-term unemployed (as well as those over 50, the handicapped, and other categories considered to be disadvantaged) and (2) temporary exemptions and hiring bonuses for certain types of apprenticeship contracts as well as subsidies for first-time employees. In July 1995, the contrat initiative emploi (CIE) was introduced (replacing the contrat de retour à Vemploi). This program provides an exemption equal to employer social security taxes at the level of the minimum wage plus a monthly subsidy ranging from F 1,000 to F 2,000, thus reducing labor costs for a person earning the minimum wage by up to 40 percent. At introduction, eligibility extended to those unemployed for more than 1 year and certain other categories (those over 50 years, the handicapped, beneficiaries of the contrat emploi solidarité (CES), and those on welfare). This measure has been modified twice since its introduction. In May 1996, the CIE was extended to youths in difficulty not registered with the unemployment office. In September 1996, eligibility for the CIE of those unemployed for less than 2 years was eliminated, while the monthly subsidy for those unemployed between 2 and 3 years was reduced from F 2,000 per month to F 1,000 per month.

Apart from the extension of the CIE to the young in difficulties (see above), few changes intervened in measures targeted at the young. In May 1996, a hiring bonus under the regular apprenticeship program of F 6,000 and annual subsidy of F 10,000 were introduced to ensure harmonization with the contrat de qualification. Subsidies for first time employees (the aide au premier emploi des jeunes, APEJ) were increased to F 3,000 for youths in difficulty. Social security exemptions for apprenticeship programs remained unchanged in 1996.

The contrat initiative emploi, the increase in rebates for those working part-time, and the regressive rebates on social security contributions for those earning below 1.2 times the minimum wage, provide fiscal incentives ranging from 40 percent of labor costs for long-term unemployed (and other selected categories), to 20 percent for part-time workers, to 12 percent for low-income earners (Table 11).

Part-time work and reductions in working hours

Part-time work, which since September 1992 had already benefitted from a 30 percent rebate on social security contributions, was made substantially more attractive to employers through the introduction of the ristourne dégressive (see above). Employers benefit from social security tax reductions as long as monthly payments to a worker fall below the monthly minimum wage for full-time work, irrespective of the number of hours worked; currently, the rebate is proportional to the number of hours worked. For example, for an employee who works 20 hours at 2 times the hourly minimum wage, the rebate would amount to one half of the rebate for an employee working full-time at the minimum wage. From October 1996, these incentives will be further enhanced by eliminating the proportional reduction. Thus, for an employee working 20 hours at 2 times the minimum wage, the rebate will be the same as for an employee working 40 hours at the minimum wage. As a result, the reduction in labor costs for part-time workers earning less than the monthly minimum wage will increase from 13.1 percent to 18.6 percent.

To encourage collective agreements involving reductions in working time, the measure in the Five-Year Law which provides for partial exemptions from the payment of employer social security contributions contingent on reductions in working time of 15 percent and increases in employment of 10 percent at the enterprise level, was strengthened in August 1996. The duration for which exemptions apply was extended from three to seven years. At the same time, the requirement to reduce working hours by 15 percent was relaxed; now, working hours must be reduced by at least 10 percent. In addition, the exemption was raised to 50 percent of employer social security contributions in the first year and 40 percent in the next 6 years for collective bargaining contracts providing a reduction in working time of 15 percent combined with an increase in employment of 15 percent (compared to partial exemptions of 40 and 30 percent respectively when working hours are reduced by 10 percent).

Other labor market regulations

Few changes occurred in other areas. The increase in the minimum wage in 1996 was only slightly above the legal minimum; specifically, the discretionary portion of the increase (the coup de pouce) amounted to 0.16 percent in July 1996, compared with 2.2 percent in July 1995.⁵⁹ A new system of early retirement in exchange for new hires was introduced in October 1995. It will be financed by the unemployment insurance fund and will pay its beneficiaries (estimated at 80,000 in 1996) 65 percent of their last wage. The financing of apprenticeships was strengthened in May 1996. The new law abolishes exemptions from the apprenticeship tax and alleviates the financial burden on regions associated with apprenticeship. No changes were introduced in regulations governing hiring and dismissals.

Overview

Despite privatization, France’s public enterprise sector is still one of the largest in Europe. Publicly owned enterprises in France may be divided into four categories. The first category comprises the seven Grandes Entreprises Nationales, mainly public utilities that are at present wholly owned and controlled by the state.⁶⁰ The second category consists of enterprises in the competitive sector that are wholly owned and controlled by the state; these currently include, among others, GIAT, Aerospatiale, Thomson, Caisses des Depots et Consignations, and Credit Lyonnais. The third category consists of jointly-owned firms, in which the government has a direct but non-majority interest alongside other public-sector organisms and which are not subsidiaries of any other state enterprise (for example, Dassault Aviation). The fourth category comprises subsidiaries of the previous three categories (e.g., Arianespace and Framatome).

At the end of 1994, there were 2,351 public enterprises in France, of which 105 were directly controlled by the state (Table 12). These enterprises employed 1.25 million workers, or 7.7 percent of total dependent employment.⁶¹ The public enterprise sector, which expanded appreciably in early 1980s as a result of the nationalizations during the first Mitterand administration, has been trimmed back in recent years, mainly through privatization.⁶² A first phase of enterprise sales began in September 1986; and by August 1987, enterprises employing some 330,000 persons had been transferred from the public to the private sector. Privatization then halted and did not resume until after the adoption of the Privatization Law of 1993, which envisaged the sale of enterprises employing some 600,000 persons.

Table 12.

France: Public Enterprises

Source: INSEE.

^1/The rank of control is the number of intermediary shareholders between the state and the firms. For example, first rank firms are directly controlled by the state.

Table 12.

France: Public Enterprises

Rank of control 1/	Number	Proportion	Employment	Proportion
First rank	105	4.5	1,096,500	73.0
Second rank	412	17.5	190,700	12.7
Third rank	764	32.5	122,300	8.1
Fourth rank	676	28.8	78,800	5.2
Fifth rank	337	14.3	14,300	0.9
Sixth or more rank	57	2.4	1,900	0.1
Total	2,351	100.0	1,504,500	100.0

Source: INSEE.

^1/The rank of control is the number of intermediary shareholders between the state and the firms. For example, first rank firms are directly controlled by the state.

View Table

Table 12.

France: Public Enterprises

Rank of control 1/	Number	Proportion	Employment	Proportion
First rank	105	4.5	1,096,500	73.0
Second rank	412	17.5	190,700	12.7
Third rank	764	32.5	122,300	8.1
Fourth rank	676	28.8	78,800	5.2
Fifth rank	337	14.3	14,300	0.9
Sixth or more rank	57	2.4	1,900	0.1
Total	2,351	100.0	1,504,500	100.0

Source: INSEE.

^1/The rank of control is the number of intermediary shareholders between the state and the firms. For example, first rank firms are directly controlled by the state.

In addition to privatization, the pace of reform in the public enterprise sector has also accelerated; this to a considerable extent reflects the implementation of EU directives to facilitate competition. In air transport, the EU’s open-skies policy has stimulated a major restructuring. In the railways, separate accounts have been introduced for infrastructure and operations, with the state retaining the responsibility for the former. In the communications sector, a law has been adopted defining competition rules for voice telephony, which will be liberalized on January 1, 1998. A law has also been passed to give France Télécom the legal form of a private corporation. However, there has been no deregulation in the energy sector, reflecting disagreement among EU member states; notably, France has insisted on maintaining a monopoly in electricity distribution to households, while only gradually opening the wholesale market to competitors.

Recent developments

As a group, the public enterprises have been a drain on the public finances (Table 13). Since 1981, dividends received by the state have covered a shrinking proportion of the capital transfers paid out. The 1992–93 recession brought these problems into sharp focus and helped to motivate the 1993 privatization law. Dividend receipts fell by 10.6 percent in 1993 and would have fallen by a further 5.8 percent in 1994, but for the F 4.5 billion dividend paid by France Télécom. At the same time, capital transfers to the public enterprises amounted to F 53 billion in 1993–95, compared with F 27.5 billion during 1989 to 1992.

Table 13.

France: Finances of the Public Enterprises

Source: Rapport de l’Assemblée Nationale No.2270, November 1995.

Table 13.

France: Finances of the Public Enterprises

		Consolidated net earnings				Net financial debt
Sectors		1991	1992	1993	1994	1991	1992	1993	1994
Competitive		-3.9	-9.2	-26.4	-10.6	149.6	148.0	148.3	122.8
Monopolies		-3.5	0.6	-5.6	-2.5	512	508	504.8	500.5
Financial		4.1	-2.6	-8.7	-13.3	—	—	—	—
	Total	-3.3	-11.2	-40.7	-26.4	661.6	656	653.1	623.3

Source: Rapport de l’Assemblée Nationale No.2270, November 1995.

View Table

Table 13.

France: Finances of the Public Enterprises

		Consolidated net earnings				Net financial debt
Sectors		1991	1992	1993	1994	1991	1992	1993	1994
Competitive		-3.9	-9.2	-26.4	-10.6	149.6	148.0	148.3	122.8
Monopolies		-3.5	0.6	-5.6	-2.5	512	508	504.8	500.5
Financial		4.1	-2.6	-8.7	-13.3	—	—	—	—
	Total	-3.3	-11.2	-40.7	-26.4	661.6	656	653.1	623.3

Source: Rapport de l’Assemblée Nationale No.2270, November 1995.

The operating income of non-financial public enterprises (especially in the electricity, railroad, and arms companies) remained weak even after the recession ended, declining by one-third in 1992–95 (Table 14). In the financial enterprises, losses were incurred reflecting capital losses stemming from the downturn in real estate prices. The public monopolies, while avoiding large operating losses, continued to invest heavily and by the end of 1994 had accumulated over F 500 billion in debt (7 percent of GDP).

Table 14.

France: Operating Income of Non-financial Public Enterprises

(In millions of francs)

Source: Data provided by the authorities.

Table 14.

France: Operating Income of Non-financial Public Enterprises

(In millions of francs)

	1992	1993	1994	1995
Aéroport de Paris (ADP)	1,376	1,188	1,249	1,387
Aérospatiale	-1,246	-447	300	639
Air France	-1,509	-3,348	-900	419
Bull	-642	-1,842	238	848
Compagnie générale Maritime (CGM)	-554	-416	-369	-163
Compagnie nationale du Rhone (CNR)	476	298	413	295
COGECOM	1,611	1,367	974	648
COGEMA	570	1,242	1,260	1,621
Electricité de France (EDF)	23,971	27,299	21,954	12,937
Entreprise Minière et chimique (BMC)	348	-87	333	588
France Télécom	30,244	30,601	26,670	25,000
Gaz de France (GDF)	5,710	6,817	4,846	6,311
GIAT	-1,073	-862	-2,028	-8,016
Péchiney	3,621	2,330	2,647	5,265
RATP	1,509	1,642	1,868	1,264
Renault	7,734	609	2,317	1,259
SNCF	3,243	-839	-22	-4,554
SNECMA	118	496	13	260
SNPE	-13	12	2260	220
Thomson	1,789	2,164	2,636	2,152
Cumulative operational income	77,283	68,174	64,625	48,380

Source: Data provided by the authorities.

View Table

Table 14.

France: Operating Income of Non-financial Public Enterprises

(In millions of francs)

	1992	1993	1994	1995
Aéroport de Paris (ADP)	1,376	1,188	1,249	1,387
Aérospatiale	-1,246	-447	300	639
Air France	-1,509	-3,348	-900	419
Bull	-642	-1,842	238	848
Compagnie générale Maritime (CGM)	-554	-416	-369	-163
Compagnie nationale du Rhone (CNR)	476	298	413	295
COGECOM	1,611	1,367	974	648
COGEMA	570	1,242	1,260	1,621
Electricité de France (EDF)	23,971	27,299	21,954	12,937
Entreprise Minière et chimique (BMC)	348	-87	333	588
France Télécom	30,244	30,601	26,670	25,000
Gaz de France (GDF)	5,710	6,817	4,846	6,311
GIAT	-1,073	-862	-2,028	-8,016
Péchiney	3,621	2,330	2,647	5,265
RATP	1,509	1,642	1,868	1,264
Renault	7,734	609	2,317	1,259
SNCF	3,243	-839	-22	-4,554
SNECMA	118	496	13	260
SNPE	-13	12	2260	220
Thomson	1,789	2,164	2,636	2,152
Cumulative operational income	77,283	68,174	64,625	48,380

Source: Data provided by the authorities.