France
Recent Economic Developments
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This paper describes economic developments in France during the 1990s. The recovery of activity that took hold in the second half of 1993 slackened markedly in early 1995. The slowdown was initially evident in domestic demand, particularly private consumption. This was followed by a weakening in exports, private nonresidential investment, and stock building, which became more pronounced toward the end of the year. The strikes of December 1995 had a further—albeit temporary—negative effect on output in the fourth quarter. Overall, real GDP grew by only 2.2 percent in 1995.

Abstract

This paper describes economic developments in France during the 1990s. The recovery of activity that took hold in the second half of 1993 slackened markedly in early 1995. The slowdown was initially evident in domestic demand, particularly private consumption. This was followed by a weakening in exports, private nonresidential investment, and stock building, which became more pronounced toward the end of the year. The strikes of December 1995 had a further—albeit temporary—negative effect on output in the fourth quarter. Overall, real GDP grew by only 2.2 percent in 1995.

France - Basic Data

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Sources: Data provided by the French authorities; and staff estimates.

Changes expressed as a percent of previous year’s GDP.

National accounts basis.

Maastricht definition.

Average to September 26, 1996, percent changes calculated relative to the average for the previous year.

1996 second quarter over the same period in 1995.

I. Domestic Economy

A. Overview

The recovery of activity which took hold in the second half of 1993 slackened markedly in early 1995 (Tables Al, A2, and A3; Charts 1 and 2). The slowdown was initially evident in domestic demand, particularly private consumption; this was followed by a weakening in exports, private non-residential investment, and stockbuilding, which became more pronounced toward the end of the year. The strikes of December 1995 had a further—albeit temporary—negative effect on output in the fourth quarter. Overall, real GDP grew by only 2.2 percent in 1995. Although the economy rebounded from the strikes during the first quarter of 1996, underlying activity during the first half of the year has remained quite weak. Against this background, the unemployment rate, which had declined somewhat after reaching a record level of 12½ percent in 1994, began to edge upward again in mid-1995, and now once again stands near its record level.

CHART 1
CHART 1

FRANCE: Main Economic Indicators

(In percent)

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

Source: IMF, World Economic Outlook.1/ Aggregated using WEO weights.
CHART 2
CHART 2

FRANCE: Aggregate Demand Components

(Constant Prices, Percent Change over Same Period of Previous Year)

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

Source: INSEE, National Accounts.

Consumer price inflation remains low. The annual rate of increase in the CPI declined from 2.1 percent in 1993 to 1.8 percent in 1995. Developments in 1996 indicate a further reduction in the rate of inflation, once the effects of the increases in the petroleum tax in January 1995 and in the standard VAT rate in August 1995 are removed. This decline reflects moderate wage increases, the persistence of a substantial output gap, and the nominal appreciation of the franc.

B. Expenditure Developments

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).

CHART 3
CHART 3

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.

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.

C. Composition of Output

The growth of output in 1995 was substantially weaker than average in construction, financial services, foodstuffs, and non-durable consumption goods, and notably stronger in investment goods, transportation and telecommunications services (Table A8). The relatively strong growth of telecommunications services reflected longer-term trends, and that of investment goods followed the pattern of a normal cyclical recovery. The poor performance of financial services derived from the problems experienced in the banking sector.

D. Employment and Unemployment

Unemployment, which reached a record high in 1994, declined until mid-1995, but has subsequently returned to the record level of 12½ percent, reflecting the softening of economic activity (Chart 4 and Table A9). Although low-skilled persons still make up the bulk of the unemployed, there has in recent years been increasing unemployment among educated persons. Also, in contrast to historical trends, long-term unemployment declined by 6.4 percent (to 34.4 percent of registered unemployed) between the end of 1994 and the end 1995. This decline may have reflected the introduction of new social security tax reductions and subsidies favoring the long-term unemployed.

CHART 4
CHART 4

FRANCE: Labor Market Developments

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

Sources: OECD, Analytical Database; and staff calculations.

Employment grew markedly in the first half of 1995, responding with a lag to the strength of activity in late 1994. It began to slow during the second half of 1995, and by mid-1996 was just equal to its level a year earlier. Still, employment grew somewhat more rapidly during the second half of 1995 than might have been expected on the basis of historical relationships, possibly reflecting the strengthening of fiscal incentives for job creation (see Chapter V). However, the effect of these incentives appears to have been short-lived: by mid-1996, employment was once again increasing in line with historical elasticties.

E. Prices and Wages

Consumer price inflation declined to 1.7 percent in 1994, the lowest rate since the 1950s (Chart 5 and Table A10). Inflation remained low in 1995, averaging just 1.8 percent despite the increase in the petroleum tax at the beginning of the year and the sharp rise in the standard VAT rate, from 18.6 to 20.6 percent, in August. As in past years, rents and prices of services rose more quickly than the index as a whole. There was a temporary acceleration of inflation during the first quarter of 1996, reflecting delayed effects of the VAT increase in 1996. However, in mid-1996, prices began to decline, and by August 1996 the 12-month rate of increase in the CPI had fallen back to 1.6 percent.

CHART 5
CHART 5

FRANCE: Inflation

(Percent Change over Same Period of Previous Year)

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

Source: INSEE, National Accounts; and IMF, International Financial Statistics.

Wage increases have been moderate throughout the recovery, reflecting continued high unemployment and low inflation. At just over 2 percent, wage rises remained weak during the second half of 1995 and in the first half of 1996, despite a 4 percent increase in the minimum wage on July 1, 1995.2 The government’s decision to freeze public sector pay rates at their November 1995 levels may also have contributed to the continuation of weak wage growth in 1996. Unit labor costs in the economy as a whole increased by only 1.6 percent in 1995, while in manufacturing they continued to decline, although less rapidly than in 1994.

II. Public Finances

A. General Government

The general government deficit rose to almost 6 percent of GDP in 1993 and 1994, reflecting both the emergence of a substantial output gap during the 1992–93 recession and a further increase in the structural deficit, which reached almost 4 percent of GDP in 1994 (Tables A11 and A12).3 The deterioration in the structural balance had already begun in the late 1980s, reflecting a marked increase in social spending, particularly on pensions and health care. Concurrently, the debt of the general government, which during the 1980s had averaged 30 percent of GDP, increased to almost 50 percent of GDP by the end of 1994. These developments, in conjunction with the weakening of economic activity during the first half of 1995, and political uncertainties in April and May 1995 ahead of the presidential elections, prompted serious financial market concern about the prospect that France would meet the deficit convergence criterion for European Monetary Union.4

Against this background, the government that took office in May 1995 announced that it intended to hold the general government deficit to 5 percent of GDP in 1995 and to reduce it to 4 percent of GDP in 1996 and 3 percent of GDP in 1997.5 To this end, a supplementary budget for the state was introduced in June 1995, sufficient (on the basis of projections at the time) to hold the deficit to the initial budget target.6 Continuing financial market unrest prompted the government to announce, in late October 1995, that achieving EMU would henceforth be the highest economic policy priority. Accordingly, strong measures were presented in November 1995 to eliminate:—in the course of 1996 and 1997—the deficit of the social security system. Furthermore, the weakening of economic activity and tax receipts during the second half of 1995 made it necessary to adopt a second supplementary budget for the state in November 1995.

In the event, the measures taken in 1995 were sufficient to hold the general government deficit to the government’s target of 5 percent of GDP, and to achieve, for the first time since the late 1980s, a reduction in the structural deficit (Chart 6).7 Nonetheless the general government debt ratio continued to rise in 1995, to 52.9 percent of GDP (Table A13).

CHART 6
CHART 6

FRANCE: Fiscal Indicators

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

Sources: IMF, World Economic Outlook; and data provided by the national authorities.1/ Baseline scenario with current policies.2/ September 1996 WEO.

B. Finances of the State

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

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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.

C. Social Security System

The finances of the social security system have deteriorated sharply in recent years. Starting from a position of near balance until 1991, deficits of about 1 percent of GDP were incurred from 1992 onward (Tables A12 and A16). Much of the deterioration took place in the so-called régime général, which comprises the main pension, health, family, and accident insurance funds. The health insurance funds accounted for the bulk of the deficit, owing to a sharp increase in spending on physician services and prescription drugs. These deficits were financed by short-term credit, as the social security funds are not permitted to issue debt instruments. Approximately F 120 billion in debt (1½ percent of GDP) had been accumulated by the end of 1995.

As part of its effort to reduce the general government deficit to 3 percent of GDP by 1997, the government in November 1995 announced a sweeping reform of social security. The reform package included several steps of a general nature, as well as more specific measures affecting particular segments of the social security system, notably the four branches of the régime général. Most of planned measures had been implemented or at least passed into law by the Spring of 1996; a notable exception was the envisaged reform of public employee pensions, which was abandoned following the strikes in December 1995.16

In the régime général, slightly less than half of the adjustment (by 1997) was to come from expenditure cuts and managerial reforms, and slightly more than half from additional revenue (F 26.6 billion versus F 32.8 billion). The overall financial impact on the finances of the régime général, as it was envisaged at the time the reform was announced, is shown in Table 2. Relatively weak economic activity during the first half of 1996 has led to the emergence of a shortfall in social security receipts, and the deficit of the régime général in 1996 will probably reach F 49 billion (0.6 percent of GDP) rather than the F 17 billion envisaged in November 1995 (Table A17).

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)

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

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

Announced November 15,1995.

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).

D. Proposals for Tax Reform

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

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Tax expenditures that were proposed to be eliminated.

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.

Social security financing

The Commission proposed to gradually shift the financing of health care from the current system, which relies heavily on wage-based contributions, to a broad-based income tax from which only social minima and defiscalized savings would be exempt.33 In formulating its recommendations, the Commission aimed at both “solidarity” (through the extension of the tax base to returns from savings) and “universality” (through the narrowing of rate differentials for labor and transfer incomes).34 It envisaged that the rate of the CMU could be initially set at 1 percent (from January 1997) and increased by 1 percentage point per year, to reach a final rate of 4.5 percent. Contribution rates under current regimes would initially be reduced by 1 percentage point for each 1 percentage point increase in the CMU, even though, with the envisaged base, an offset of only 0.7 percentage points is required.35 The proposed reform would lead to an increase in taxation of civil servants and certain public sector employees (for whom bonuses are currently excluded from the tax base), retirees (taxed at a rate of 3.8 percent), and non-salaried workers (for whom social security contributions are currently excluded from the tax base).36

Local business tax

The Commission noted that a major problem with the local business tax (taxe professionelle) lies in the incentives for spending it creates at the local government level.37 The tax base consists of 16 percent of the historic cost of investment, in addition to the rental value of buildings and 18 percent of gross wages. In the absence of a deduction for depreciation, the tax base inexorably grows as new investment is made, and the taxe professionelle has great buoyancy. This has led the central government to introduce exemptions and limits, for which it has had to compensate local governments (these payments now amount to 32 percent of the yield of the tax). In order to limit the elasticity of the tax, the Commission suggested that partial depreciation of new investment be permitted.

The Commission also noted that introduction of a uniform national rate—though desirable from the point of view of equalizing business conditions across localities—is not feasible on account of the cross-regional transfers this would imply.38 However, the Commission did see scope for equalization of rates across groups pf communes, combined with the pooling of revenues from the taxe professionelle across these localities. In order to achieve this goal, the Commission suggests that the obligation of pooling be instituted by decision of a majority of the eligible communes representing a majority of eligible populations.

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

E. Local Governments

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)

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Source: INSEE, Rapport sur les comptes de la nation, various issues.
Table 5.

France: Local Government Receipts

(In percent of total revenue)

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Source: DGCL.
CHART 7
CHART 7

FRANCE: Local Government Finance and Employment

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

Source: Data provided by the authorities.

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

Fiscal Decentralization in France

France has a long-standing tradition of strong centralized government, although in recent years it has pursued efforts to decentralize public administration. In 1789, the country was divided into departments to give the constituent assembly a tight administrative control over the national territory and to destroy local privileges. A Napoleonic reform in 1800 led to the creation of a prefectoral system, which buttressed the central government by putting at the head of each department a powerful official (préfet) directly appointed by Paris. This system endured with little change for the next century and a half. The first major step towards decentralization took place only in 1972, when some 22 regions, at a level above that of the departments, were established. A far-reaching reform was finally launched with the decentralization Laws of 1982 and 1983.

France now has three layers of local governments: the country is administratively organized into 22 regions, 100 departments, and 36,551 municipalities (or communes). Regions became full-scale jurisdictions, with elected and independent councils. The a priori control exerted by the préfets was abolished and transferred to the councils. Finally, new powers were given to each of the subcentral levels, by the transfer of functions or through the establishment of concurrent authority.

Municipalities primarily act in fields such as communal services, education, health, sports, recreation, school building, housing, and road maintenance. Owing to their extremely large number and small size (70 percent have less than 700 inhabitants), municipalities most often pool their resources to provide these services (through syndicats de services). The responsibilities of the regional councils include integrated transport planning, housing strategy, high school development programs, vocational training, and rural conservation. General councils, which are elected bodies at the level of departments, are responsible for the provision and maintenance of roads (excluding national roads and minor roads for which the municipalities are responsible), social and health services, and middle school development programs. This allocation of functions does not preclude overlap. Social policy, for example, is implemented at all levels. Local governments were given the authority to levy certain fees and taxes to finance their activities.

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

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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)

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Source: INSEE.

III. Monetary and Exchange Rate Developments

Monetary policy over the past decade has successfully kept inflation low and held the exchange rate stable vis-à-vis the strongest currencies in the EMS. The stability of the franc has gone hand in hand with lasting improvements in the competitiveness of the economy. These achievements have been based on a strong commitment to monetary stability—repeatedly tested during episodes of exchange market tensions—which has firmly established the credibility of the Banque de France (independent since 1994). The credibility of monetary and exchange rate policy is also evidenced by the marked narrowing of the differential between French interest rates and those of other European countries pursuing a hard-currency policy.

A. The Conduct of Monetary Policy

The principal objective of French monetary policy is the maintenance of price stability, presently defined as ah annual inflation rate below 2 percent. To achieve this objective, the Banque de France relies on two intermediate targets, one external and one internal. The external objective is the stability of the franc in terms of the group of the most credible currencies within the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). The internal objective is to maintain the average growth rate of broad money (M3) in the vicinity of 5 percent over the medium term.45 In addition, the Banque de France monitors indicators such as total domestic debt (which tracks changes in borrowing from credit institutions and markets in the personal, corporate and government sectors), long-term interest rates, and the balance of payments.

1. Since the reform of French financial markets in 1985–87, the Banque de France has implemented monetary policy using indirect instruments, notably the two official interest rates (Unix directeurs). Central bank operations are carried out primarily on the interbank market, principally using repurchase agreements that define the upper and lower limits of the market interest rate. The lower bound, often referred to as the intervention rate (pensions sur appels d’offres) is the outcome of calls for tenders which are made at the discretion of the central bank.46 The upper bound is the rate on the five-to-ten day repurchase agreements (pensions de 5 à 10 jours), which are contracted at the discretion of the commercial banks. The spread between the lower intervention rate and the ceiling rate has been around 100 to 150 basis points in periods of calm.

Repurchase agreements in both windows are based on government and eligible private paper (Treasury bills and bills representing loans with an original maturity of less than two years to firms receiving the highest credit rating given by the Banque de France). The amount of liquidity offered at the intervention rate declined somewhat in 1995, following a temporary increase in December 1994.

The Banque de France also influences short-term market interest rates in order to “fine tune” the provision of liquidity. It intervenes in the interbank market through overnight repurchase agreements and open market operations (i.e., operations outside the interbank market) using government bonds. These interventions, once rare, have become more frequent in recent years. Non-remunerated required reserves, which are not actively used as an instrument of monetary policy, were substantially reduced in 1992 to alleviate banks’ operating costs.47

B. Exchange and Interest RateDevelopments

After weathering two episodes of exchange market tensions in 1995, the franc firmed against almost all major European currencies during the fourth quarter. The first turbulent episode began in March 1995, brought on mainly by market concerns about slippages in the public finances and doubts about the authorities’ ability to meet the convergence criteria for EMU. The franc deviated by up to 6½ percent from its central ERM parity (reaching a low of 3.58 francs per deutsche mark, Chart 8). The Banque de France responded by temporarily replacing its 5–10 day repurchase facility at 6.4 percent with a one-day facility at 8.0 percent, while leaving the intervention rate unchanged. The franc strengthened in April after the Bundesbank cut German rates; and the rate on the one-day facility was reduced to 7.75 percent. Currency tensions eased further after the presidential elections, and by early June, the Banque de France was able to reinstate the 5–10 day facility at an interest rate of 7.5 percent. This action was followed by two cuts in the repurchase rate, to 7½ percent in July (Table A19).

CHART 8
CHART 8

FRANCE: Exchange Rate Indicators

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

Source: IMF, Treasurer’s Department and International Financial Statistics.

In late summer 1995, the franc came under renewed pressure, trading as low as 3.52 francs per deutsche mark. This episode again reflected concerns about the authorities’ commitment to adequate fiscal consolidation. The Banque de France once more replaced its 5–10 day repurchase facility at 6.15 percent with a one-day facility at the same rate; on October 9, the 5–10 day facility was reinstated at a rate of 7.25 percent. This unconditional defense of the exchange rate, coupled with the decisive confirmation in late October of the government’s commitment to fiscal consolidation and monetary union in Europe, quickly restored confidence in the financial markets. The franc appreciated markedly, and the 5–10 day rate was successively cut to 5.85 percent by the end of 1995.

During the first half of 1996, the franc continued to appreciate in the ERM, reaching 3.37 francs per deutsche mark in late April, less than 1 percent from the ERM central rate of 3.36. Growing conviction among market participants that EMU would begin as scheduled on January 1, 1999, and the marked strengthening of the dollar against the deutsche mark, contributed to this development. Some pressures on the franc briefly re-emerged in August 1996, once more reflecting doubts about France’s ability to meet the deficit criterion for EMU in light of the softness of economic activity. This pressure on the franc was alleviated on August 22 by a 30 basis point cut in Germany’s repurchase rate, which was followed in two steps by the Banque de France, on August 22 and September 19.

Overall, short-term interest rates have eased markedly since last October, paralleling developments elsewhere in Europe. The official intervention rate has been reduced by a cumulative 375 basis points to 3.25 percent in September (Chart 9 and Table A19). The ceiling repurchase rate has also been reduced to an all-time low of 4.9 percent. Short-term market rates have declined, albeit not by quite as much; at about 50 basis points in late September, the short-term interest rate differential with Germany is still larger than the spread between official short-term rates. The reduction in official rates has also not been matched by a decline in the base rate charged by commercial banks (Table A19).

CHART 9
CHART 9

FRANCE: Interest Rates and Inflation

(In Percent)

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

Sources: IMF, International Financial Statistics and Treasurer’s Department.

Long-term interest rates, over which the monetary authorities have no direct control, have also declined since the beginning of 1996, and yields on French 10-year government bonds in September were equal to those in Germany and below those in the United States. At the end of 1995, by contrast, the long-term interest rate differential with Germany still stood at nearly 100 basis points (Chart 9).

C. Monetary Aggregates and Domestic Debt

In line with weakening economic activity, monetary aggregates continued to grow at a modest pace in 1995 (Chart 10; and Tables A20 to A22). Ml grew slowly until November 1995, but accelerated thereafter to an annual rate of 3.8 percent, mainly as result of an increase in sight deposits following the December strikes. M2 increased by 5.5 percent, on account of increased deposits in passbooks and other tax-exempt saving instruments at regulated interest rates, which constitute the aggregate M2-M1. This development inter alia reflected the announcement of tax measures, which reduced the relative attractiveness of unregulated saving instruments in favor of regulated instruments (livret A, livret bleu, and Codevi).48 The rate of tax-exempt interest paid on these accounts had not been changed since 1986, making them comparatively even more attractive. M3 expanded by 4.1 percent in the twelve months to December 1995, only slightly faster than the increase in nominal GDP over the same period, but slightly less than the medium-term target rate. M3-M2, which comprises liquid saving instruments at non-regulated rates, posted a 2.3 percent increase in the twelve months to December 1995, mainly reflecting tax changes in 1995.49

CHART 10
CHART 10

FRANCE: Monetary Indicators

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

Sources: IMF, International Financial Statistics and Banque de France.1/ Ratio of nominal GOP to M3 (respectively total domestic debt).

Partly reflecting arbitrage activity away from money market instruments towards longer term saving instruments, the growth of monetary aggregates recorded a marked deceleration in the first half of 1996 (Chart 10). While Ml continued to expand strongly as lower interest rates reduced the opportunity cost of sight deposits, M3 expanded by only 2.4 percent in the twelve months to May. This development is attributable to withdrawals from savings deposits in the face of declining short-term interest rates. Notably, as part of its package of measures to stimulate the economy, the government in early 1996 reduced the statutory interest rate on livret A and livret bleu accounts from 4.5 to 3.5 percent. This step also induced households and firms to re-allocate their portfolios more towards long-term saving instruments (contractual savings, People’s Saving Plans, Housing Saving Plans), leading to a 16 percent annual increase of the P1 aggregate.50

Total domestic debt (endettement intérieur total, EIT) is monitored closely by the Banque de France, reflecting its belief that the role of credit in financing the economy has become less important.51 In 1995, EIT rose by 5.4 percent, with a sharp increase in the government component (13.5 percent) and a relatively slight increase in corporate and household debt (Table A23). The growth of EIT slowed slightly further, to 5 percent in March 1996. As in 1995, government borrowing accounted for much of the increase. Overall, the growth in EIT over the last year and a half appears to be in line with developments in interest rates and economic activity; the former remained relatively high in real terms for much of the period, while the latter was fairly weak.

IV. External Sector

A. Trade and Current Account Developments

The surplus on goods, services, and income increased from F 84 billion in 1994 to F 114 billion in 1995, a development that may be attributed to the relative weakness of France’s cyclical position and the continuing adequacy of its external price and cost competitiveness (Table A24). Reflecting the slowdown in France and several of its European trading partners during 1995, trade in goods and services grew less rapidly than in 1994; import growth decelerated from 8.7 percent to 5.3 percent, while export growth slowed from 8.1 percent to 5.4 percent (Chart 11). Developments thus far in 1996 suggest that exports and imports are still growing, albeit much more slowly than during the previous two years.

CHART 11
CHART 11

FRANCE: Trade and The Current Account

(In Percent of GDP)

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

Source: IMF, Datafund.

French exports of manufactures have been about as strong as in other OECD countries (Table 8). Regarding sectoral balances in 1995, net exports of transportation services increased substantially (Table A25). The deficit in the energy account continued to decline, owing to the fall in oil prices (in francs) and growing exports of electricity. The surplus in agricultural products, while larger than in 1994, was still below the level in 1993.

Table 8.

France: Country Shares in Exports of Manufactures of 9 Large OECD Countries

(In percent)

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Source: Ministry of Finance.

The geographic distribution of trade has remained broadly stable, with the European Union accounting for almost two-thirds of the total (Table A26). Within the Union, the largest surplus is with the United Kingdom. Net exports to Italy—in particular machinery—continued to grow. The balance with Germany was broadly unchanged in 1995, reflecting growing exports offset by increased imports of automobiles. Exports to other OECD countries continued to decline—principally owing to an 8 percent drop in aircraft sales to the United States.

By contrast, exports to non-OECD countries continued to grow in 1995. Emerging countries in Asia increased their purchases by 28 percent (accounted for by a surge in aircraft sales); and France ran a surplus with this region. The deficit with China rose markedly, owing to a continuing increase in imports from this country. Exports to transition economies in eastern Europe increased by 22 percent; and the deficit with this region declined. The surplus vis-à-vis Africa also increased. Overall, exports to emerging countries continued to grow quickly. There appears to be ample room for future increases, given France’s small market share in these countries (Table 9).

Table 9.

France: Imports of Emerging Countries by Origin

(In percent of total imports)

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Source: IMF, Direction of Trade.

Weak domestic demand in France and elsewhere in Europe, combined with the nominal appreciation of the franc, dampened increases in import prices in 1995 and early 1996. In some cases (e.g., household durable goods), import prices even declined. Generally, importer’s margins appear to have increased somewhat. By contrast, exporters’ margins have suffered some compression. The appreciation of the dollar in early 1996 (which, however, still leaves it 5 percent below its 1994 average rate vis-à-vis the franc) should help to improve the competitiveness of French products in a number of sectors, ranging from military goods to apparel (including leather goods).

The surplus in services declined in 1995, largely owing to lower net receipts from tourism and business services (Table A27). Receipts from tourism were stagnant, reflecting the appreciation of the franc vis-à-vis pound sterling, the peseta, and the U.S. dollar (terrorist actions in Paris over the summer may also have reduced tourist visits). By contrast, French expenditure on tourism (especially in Spain and in the United States) increased.

The deficit of the income account fell by almost half in 1995, reflecting a reduction in interest payments in the aftermath of a marked decline in the share of the public debt held by foreigners, and also reflecting an improvement in receipts from direct investment abroad. The deficit on current transfers also fell, largely owing to a reduction in the contribution to the EU budget and an increase in structural transfers from the EU.

B. Capital and Financial Account Developments52

The capital account (in the new nomenclature) showed only a small deficit in 1995, as there were no major write-offs of external debt; this contrasts markedly with the situation in 1994, when there was substantial debt forgiveness following the devaluation of the CFA franc (Table A28). By contrast, the financial account showed substantially higher outflows, which were principally attributable to an increase in the foreign currency holdings of French banks.

Inward flows of direct investment remained steady while outflows decreased, leading to a F 25 billion surplus (in contrast to the deficit experienced in 1994). France continued to be the second-largest recipient of foreign investment in Europe. It may well retain this position given two recent policy actions: the elimination in early 1996 of prior authorizations for foreign investment; and the abolition of the 20 percent ceiling on the purchase of the capital of companies to be privatized that was previously imposed on non-EU investors.53

Net outflows in the portfolio investment account declined markedly in 1995 as foreigners slightly increased their holdings of government debt (in 1994, by contrast, foreigners had reduced their holdings of debt securities by almost F 200 billion—about 2½ percent of GDP). Foreign holdings of French equities continued to increase in 1995, despite a relatively subdued stock market (price to earning ratios rose further, partly reflecting this foreign demand for French equities). Investment in foreign securities by residents remained strong in 1995 (at F 118 billion) and can largely be viewed as a counterpart to the current account surplus and relatively weak direct investment abroad. This outflow also appears to reflect the large supply of government debt in Europe (purchases of equity have been modest).

Short-term flows in 1995 were dominated by financial activities associated with the fluctuations of the franc. In particular, the large foreign currency positions built up by French banks appear to reflect their desire to cover forward sales of francs by non-residents.54 These positions peaked in March and September, when the franc was under pressure; British banks were the main counterparts. To some extent, French banks also increased their foreign currency positions as a result of the sharp decrease in residents1 holdings of mutual funds outside France.

International reserves increased slightly, with a small increase in holdings of SDRs and other deposits at the IMF. Overall, France’s net foreign asset position—although still negative at F 314 billion—improved by F 225 billion in 1995, reflecting both continuous improvements in the current account and the appreciation of the franc (which, in particular, had an important impact on the value of net direct investment) (Table A29).55

V. Structural and Other Issues

This section reviews selected structural issues in the labor market and the public enterprise sector, and provides an overview of recent developments in trade and aid policy.

A. Labor Market Policy

During 1995–96, labor market measures to promote employment of selected groups as well as part-time employment were considerably strengthened. The unifying principle of recent policies continues to be to reduce the cost to employers of persons with little training or experience, or of those whose human capital has been adversely affected by long-term unemployment. While the low-skilled account for the bulk of the unemployed, joblessness among more highly trained persons continued to rise in 1995 (Chart 12). In addition, policies have sought to promote part-time work through fiscal incentives. The budgetary cost of employment programs has reached FF 90 billion (slightly more than 1 percent of GDP), while covering about 5 million persons (Tables 10 and 11).

CHART 12
CHART 12

FRANCE: Unemployment Rate by Education Level

(In Percent)

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

Source: INSEE and staff estimates.
Table 10.

France: Budgetary Cost of Employment Measures for the Private Sector

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Source: Ministry of Labor.
Table 11.

France: Labor Cost Reduction and Beneficiaries of Employment Measures

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Source: Ministry of Labor.

From October 1996. Maximum amounts. For full-time worker at minimum wage or part-time worker earning up to two times the hourly minimum wage.

From September 1995. Maximum amounts. For full-time worker at minimum wage or part-time worker earning two times the hourly minimum wage.

For Employment Initiative Contract.

Including apprenticeship.

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.

B. Public Enterprises

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

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Source: INSEE.

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

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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)

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Source: Data provided by the authorities.
Non-financial enterprises in the competitive sector

Public enterprises in the transport sector (except the Paris airports) have incurred losses or undergone restructuring. In July 1996, Air France received the third installment of the F 20 billion capital injection decided upon in 1994.63 Despite revamping its Paris hub and reducing its corporate debt, Air France continues to face fierce competition; and its prospects remain highly uncertain. The integration of Air Inter into Air France has been made more difficult by the early opening of domestic lines to international competition (in 1995 instead of 1997), which has reduced the market share of Air Inter on its main lines by some 40 percent.64 The shipping company CGM is slated for early privatization, although it gave up its lines to the Far East and it may require a F 1 billion capital injection before being sold.

In the industrial sector, the reduction of military expenditure has taken a toll on the main enterprises. The combat tank maker GIAT (which employs 8,000 workers but has lost about 30 percent of its orders since 1992) received a F 2 billion capital injection in early 1996 (about the size of its annual losses); downsizing is expected to continue. Some of the naval shipyards belonging to the Direction de la Construction Navale (a government agency employing 24,000 workers) are scheduled to close soon. There are plans to transform the agency into a corporation and to sell some of its lines of business to defense or shipbuilding enterprises. The aircraft engine maker SNECMA has recently incurred losses in its commercial jet turbine business (a partnership with General Electric), reflecting the weakness of the U.S. dollar and strong competition. Regarding Aérospatiale, the government envisages a merger with Dassault Aviation in order to take advantage of potential synergies. The new group would be controlled by the government. A recapitalization (of some F 8 billion) and a substantial reduction in the workforce are also being envisaged. The defense and multimedia company Thomson, which accumulated F 9 billion in losses during 1990–94 (in part because of its participation in Credit Lyonnais in 1989–96) is slated for privatization in late 1996, generating gross receipts of about F 40 billion. A capital injection of F 8-10 billion may be required to offset part of its F 20 billion debt (half of which originated in the purchase of RCA in the 1980s).65 The computer maker Bull made a small profit in 1995 (F 0.3 billion), after losing F 20 billion in 1990–94 and receiving F 11 billion from the state. The improvement on its accounts reflects a restructuring process intensified in 1993 and based on halving its workforce (originally 48,000 strong), the sale of unprofitable subsidiaries (e.g., Zenith), and the entry of three new private shareholders in 1995 (Motorola, Dai Nippon Printing, and IPC of Singapore). There are plans to privatize the company in 1997.

Public monopolies

In the monopolistic public utility sector; the government plans to transform France Télécom into a stock corporation by the end of 1996, with sales of shares to the private sector beginning in 1997.66 These steps are seen as necessary in light of the pending full liberalization of voice telecommunications (as mentioned above).67 Privatization should pose few difficulties given the recent financial performance of France Télécom, even though the planned reduction in its F 85 billion debt has proceeded more slowly than anticipated. Indeed, the debt is likely to increase next year because France Telecom will pay a F 38 billion lump-sum transfer to the government, in exchange for the latter assuming the cost of France Telecom’s future pension liabilities.

The electricity company EDF has also shown healthy profits, part of which have been used to reduce its F 145 billion debt. EDF has begun to provision for the construction of new plants and decommissioning old ones, at a cost over the next 10–15 years estimated at around F 500 billion for new plants and F 100 billion for cleanup (mainly of nuclear power plants). The actual costs of decommissioning the nuclear power plants could be substantially higher. France remains opposed to a full liberalization of the EU electricity market. Gaz de France is another profitable monopoly, which reduced its debt by one-third in the last three years. The coal company Charbonnages de France continues its planned downsizing, but there are no plans to liquidate it following the closure of its last mine in France in 2005.

The railroad company SNCF has shown a deficit for a number of years; in 1995, the shortfall amounted to F 16 billion (0.2 percent of GDP). Restructuring plans for 1996 emphasize a stabilization of the wage bill by cutting the 180,000 strong workforce by 2 percent through attrition and reducing investment by 8 percent. Although details remain to be fixed, the implementation of EU directives has laid the groundwork for increased competition, with the rail network to be opened to outside operators of trains. The competitive position of the SNCF as an operator of trains in this new environment will be bolstered by transferring about half of its F 200 billion debt to a new state agency responsible for railroad infrastructure. Regional governments will be expected to defray the costs of maintaining unprofitable local rail operations.

Public financial institutions

The involvement of the state in a considerable number of loss-making financial institutions will ultimately have a budgetary impact, though for now, restructuring costs have been kept off the books of the general government. In 1995, Crédit Lyonnais required a rescue package amounting to F 50–80 billion, to be spread over 20 years.68 Two small banks (Banque Hervet and Société Marseillaise de Crédit) have received capital injections of F 1.3 billion and F 0.8 billion, respectively, to cover write-offs of bad loans to small enterprises and real estate developers. Both of these banks are slated for early privatization. The insurer CNP, which relies on the Postal Office to sell its products, has been profitable. The Came de Dépôts et Consignations (CDC), which plays numerous roles ranging from traditional treasurer of local governments to manager of contractual savings channeled to finance low-income housing, has suffered some losses from its participation in numerous unprofitable public enterprises. The Postal Office manages a large number of small saving accounts, for which it is paid 1.5 percent of the amount collected (funds are channeled to CDC). The accounts of the post office make it difficult to separate the financial results of its banking and mail distribution operations.

The insurer GAN has suffered losses in both the damage insurance business and in the real estate sector, where it absorbed the portfolio of bad loans from the banks it owns—CIC and EUIC). The insurer AGF was privatized in early 1996. The government has recently revamped the loss-making CEPME bank (now BEPME), and expects to increase its role in the financing of small business.

Privatization

In July 1993, the newly elected conservative government passed a law providing for the privatization of 21 enterprises in the competitive sector (Table 15). Healthy companies were the first to be sold; their public offerings were over-subscribed and brought large sums to the Treasury (Table 16). The performance of shares of privatized firms has been mixed (Table 17).

Table 15.

France: List of Privatizations

(In billions of francs)

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Announced.

Further 6 percent of the capital were sold over the counter in July 1996.

In process.

Table 16.

France: Privatization Receipts and Uses

(In billion of francs)

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Source: Treasury
Table 17.

France: Performance of the Stock of Privatized Firms

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Source: Press reports.

The downturn in the stock market and the unsatisfactory financial condition of many of the remaining enterprises caused the pace of privatization to slow markedly in mid-1994, and privatization receipts fell sharply in 1995. Actions taken by the new government since it took office in May 1995 included attracting new partners into Bull, selling Usinor-Sacilor and Pechiney in 1995, selling AGF in the spring of 1996, implementing the second phase of the privatization of Renault, and setting the stage for the privatization of CIC, Thomson, and CGM, with bids to be presented by the end of 1996. Greater emphasis has been put in attracting institutional investors, while still attempting to maintain a stable core of shareholders.

C. Trade and Aid Policies

France is an EU member state and its trade policy is set at the European level. Nonetheless, France clearly has a significant influence on the trade policy positions taken by the EU in regional and multilateral negotiations.

Policy actions taken by the EU in the last year include the conclusion, in December 1995, of the negotiations on compensatory tariff changes following the entry into the EU of Austria, Finland, and Sweden. Tariff rates were lowered in several sectors (notably electronics and chemicals), with cuts coming into effect on January 1, 1996, ahead of the WTO calendar. The EU also continued pursue agreements to deepen bilateral and regional cooperation: notable events include the entry into force of the customs union with Turkey, the signing of trade and cooperation agreements with Mercosur and with Chile, and the successful conclusion of negotiations on free-trade agreements with Israel, Morocco, and Tunisia. Negotiations are underway on free-trade agreements with Algeria, Egypt, Jordan, and Lebanon; and negotiations are set to begin with Mexico.

Commercial relations with transition economies in central and eastern Europe continue to be governed by association agreements with the EU. France has been supportive of these agreements in their current form, though it maintains.that safeguard clauses are still needed for sensitive sectors (e.g., textiles).

The first WTO ministerial conference is scheduled to take place in Singapore in late 1996. Key issues will most likely include financial services, telecommunications, direct investment, social norms, and the relative roles of global versus regional trade agreements. First, regarding financial services, France would like to see a global agreement by the end of 1997. Second, in the area of telecommunications, France has expressed its readiness to sign the proposals on the table. However, it remains opposed to a full liberalization of trade in audio-visual services. Third, France supports the adoption of a strong framework governing direct investment. Once an agreement has been reached among OECD countries, France would like to see the opening of negotiations on a similar framework under the auspices of the WTO. Fourth, regarding social norms, France supports the position taken by the G7 that there is a link between trade and internationally recognized legal standards, notably minimum labor standards.69 Fifth, France is inclined to believe that the rise of regional trading blocks poses problems from a systemic point of view. Notably, global trade liberalization is generally preferable on welfare-economic grounds, as regions may be too small to support an optimal international division of labor. Moreover, agreements reached between various free trade zones have typically resulted in the maintenance of too many restraints on trade. On the whole, the French position was that trade liberalization should be pursued through the WTO.

France’s official development assistance has been generous by international standards. As fiscal consolidation has become a higher priority, the share of ODA in GDP has declined somewhat, from 0.64 percent in 1994 to 0.55 percent in 1995 (Table 18). Approximately three-quarters of French aid is bilateral, and well over half is in the form of grants.

Table 18.

France: Official Development Assistance

(In billions of francs)

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Source: Data provided by the authorities.

Preliminary.

STATISTICAL APPENDIX

Table A1.

France: Macroeconomic Performance in Comparison with Germany and G-7 Countries

(Annual growth rates, in percent)

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Sources: INSEE, Rapport sur Les Comptes de la Nation; and International Monetary Fund World Economic Outlook

Consumer prices.

In percent of the labor force.

In percent of GDP.

Average of 1977–80 instead of 1971–80.

Table A2.

France: Aggregate Demand 1/

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Source: INSEE, Quarterly National Accounts.

Constant 1980 prices; data are based on quarterly national accounts.

Households only.

Contribution to growth.

Table A3.

France: Contributions to GDP Growth

(Percentage contributions to the growth of GDP at 1980 prices) 1/

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Source: INSEE, Quarterly National Accounts.

Data are based on quarterly national accounts.

Households only.

Table A4.

France: Household Income and Spending

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Sources: INSEE, Quarterly National Accounts.

Including all actual and imputed social security contributions.

Gross wages minus social security contributions of employees.

Contributions of employees and employers.

Table A5.

France: Real Incomes and Selected Ratios of the Household Sector

(In percent) 1/

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Source: INSEE, Quarterly National Accounts.

Data based on quarterly national accounts.

Deflated by private consumption deflator.

Including all actual and imputed social security contributions

Table A6.

France: Income and Expenditure of Nonfinancial Corporate Enterprises 1/

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Source: INSEE, Quarterly National Accounts.

Enterprises and quasi-enterprises (SQS).

Unless otherwise noted.

In percent of resources.

Table A7.

France: Saving-Investment Balance

(In percent of GDP)

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Source: INSEE, Quarterly National Accounts.

Financial sector and private administration

Stockbuilding included.

National accounts basis.

Table A8.

France: Structure of Output

(Value added in constant 1980 prices: in percent)

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Source: INSEE, Quarterly National Accounts.

Secteur marchand, excludes public administration.

Excluding the imputed services of the financial sector.

Table A9.

France: Labor Market

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Source: INSEE, Rapport sur les Comptes de la Nation.

As percent of labor force.

Table A10.

France: Price Developments

(Changes in percent from same period of preceding year)

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Sources: International Monetary Fund, International Financial Statistics; OECD, Main Economic Indicators; and INSEE, Rapport sur les Comptes de la Nation.

National accounts definition.

Table A11.

France: Consolidated General Government Accounts 1/

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Source: INSEE, Quarterly National Accounts.

National accounts basis. Accounts.

Data may differ slightly from annual national accounts, and do not include adjustment for revised accounting treatment of accrued interest (“coupons courus”).

As reported in annual national accounts.

Deflated by GDP deflator.

Table A12.

France: Public Sector Financial Balances 1/

(In billions of francs and in percent of GDP)

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Sources: INSEE, Rapport sur les Comptes de la Nation: and da ita provide d by the French authorities.

National accounts basis, including Fonds de Stabilisation i des Changes (FSC); plus sign indicates financing capacity.

Grandes enterprises nationales only: Charbonnages de France, Electricite de France, Gaz de France, SNCF, RATP, Air France, Air Inter, La Poste, France Telecom.

Includes adjustment for accrued interest on government bonds (“coupons courus”).

Table A13.

France: Government Debt

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Source: Ministry of Finance.

Maastricht basis.

Table A14.

France: Central Governmet Budget

(Administrative basis: in billions of francs)

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Sources: Budget documents and data provided by the French authorities.

Including net special accounts (comptes d’affectation speciale).

Fonds de stabilization des changes (FSC)

Overall balance minus gross interest payments.

Table A15.

France: Central Government Revenue and Expenditure 1/

(Changes in percent)

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Sources: Budget documents and data provide by the French authorities.

Budgetary outturns on an administrative basis.

Net of revenue sharing and tax refunds.

Deflated by GDP deflator.

Table A16.

France: Finances of Social Security Regimes 1/

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Source: INSEE, Rapport sur les Comptes de la Nation.

National accounts basis.

Other revenue and expenditure in 1994 include the accrual of transactions resulting from assumption of the social security debt by the State.

Table A17.

France: Social Security, Régime Général 1/

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Source: Les comptes de la sécurité sociale, June 1996.

Administrative basis. Data for 1996 are official projections (as of June 1996).

Table A18.

France: Local Government Finances 1/

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Source: INSEE, Rapport sur les Comptes de la Nation.

National accounts basis.

Table A19.

France: Key Interest Rates

(In percent per annum: period averages)

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Sources: Banque de France, Bulletin Trimestriel, and IMF, International Financial Statistics.

A 2 percent surcharge for special social security contribiitions to be added to all withholding taxes on interest income.

Rate on the appels d’ offres; end of period.

Average of maximum and minimum rates, with spread of up to 5–6 percentage points.

Observations taken in January, April, July, and october.

Livrets A or Bleu, included in M2-M1.

Table A20.

France: Main Monetary Aggregates

(In billions of francs and growth rate in percent) 1/

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Source: Banque de France, Bulletin Trimestriel.

End of period data and year-on-year percentage changes.

Staff estimates.

Table A21.

France: M3 and Its Counlterparts

(In billions of francs, end of period)

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Sources: Banque de France, Bulletin Trimestriel.
Table A22.

France: Monetary Base and Its Counterparts

(In billions of francs)

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Source: Banque de France, Bulletin Trimestriel.
Table A23.

France: Total Domestic Debt and Its Components

(In billions of francs)

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Source: Banque de France, Bulletin Trimestriel.

Year-on-year percent change.

Table A24.

France: Summary Balance of Payments

(In billions of francs)

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Source: Banque de France.
Table A25.

France: Merchandisese Trade

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Sources: INSEE, Quarterly National Accounts; and IMF, International Financial Statistics.

National accounts data.

Volume ratios of exports to imports.

1980=100.

Agriculture plus services.

Table A26.

France: Direction of Trade

(Expressed as percentage of total)

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Source: International Monetary Fund, Direction of Trade.
Table A27.

France: Current Account

(ln billions of francs)

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Source: Banque de France.

Adjustment for coverage, classification, valuation, timing of exports and imports, nonmonetary gold, and repairson goods.

Table A28.

France: Financial Account

(ln billions of francs)

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Source: Banque de France.
Table A29.

France: Net Foreign Assets Position 1/

(In billions of francs)

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Source: Banque de France.

Variations in NFA position reflect balance of payment flows and valuation adjustments.

1

Although this interest rate change did stimulate consumption, its primary effect was to encourage households to shift savings from passbook accounts into housing-saving plans, life insurance, and sight deposits.

2

The minimum wage (SMIC) is adjusted as follows: (1) whenever the CPI has risen by 2 percent since the last adjustment; (2) on July 1 each year, by at least half the increase in real hourly wages in industry; and (3) at the government’s discretion.

3

The general government accounts comprise the central government (which may be further subdivided into the state and a number of dependent funds), the social security system, and the regional and local administrations. Each of these sectors will be discussed in detail below.

4

As described in the section on monetary and exchange rate developments in this report.

5

These objectives are somewhat less ambitious than those in the original convergence program in 1993, which envisaged reducing the general government deficit to 2 percent of GDP in 1997.

6

Deficit targets for the state are set in accordance with the five-year budget law, which prescribes a reduction in the deficit of the state by ½ percent of GDP per year, to be achieved primarily by keeping expenditure constant in real terms.

7

Since early 1996, the level of the general government deficit reported by the government has been about 0.2 percent of GDP lower than on the current national accounts concept. This reflects a change in the accounting treatment of interest payments on the public debt that was described in full in INSEE, Rapport sur les comptes de la Nation 1995, pp. 9 and 189.

8

The surcharge on the wealth tax applies only to tax payments of over F 4.47 million.

9

Since 1967, the government has provided more than F 46 billion in advances to the Social Housing Guarantee Fund (Caisse de garantie du logement social, CGLS). Repayment by the CGLS of a portion of these (highly subsidized) loans is to begin in 2002. The Government decided to cede this claim on the CGLS to the Caisse des Dépôt et Consignations in exchange for the payment of F 15 billion.

10

The government expects that restricting the resources of the local authorities will not lead to an increase in deficits at the local level, as there are fairly strict limits on borrowing by the local authorities.

11

Of course, this measure will have no net effect on the general government deficit.

12

New measures taken in 1996 are valued at F 10½ billion and include increases in taxes on gasoline, alcohol, and tobacco. The fall-year effect in 1996 of the measures taken in connection with the supplementary budget of July 1995 is estimated at F 70 billion, of which more than 80 percent is attributable to the increase in the standard VAT rate in August 1995 from 18.6 to 20.6 percent. The effect in 1995 of tax measures taken in the July supplementary budget is now estimated to be F 32V£ billion.

13

In part, these savings will be offset by the small package of measures to stimulate consumption and investment that was adopted in early 1996.

14

Further details may be found in the forthcoming supplement to SM/96/242.

15

The budget is based on projected growth of real GDP of 2.3 percent and inflation of 1.5 percent.

16

The principal proposed reform of public employee pensions was an increase in the length of the contribution period required to receive a full pension from 37.5 years to 40 years, as in the private sector.

17

The total debt taken on by the CADES amounts to F 137 billion: F 120 billion accumulated by the social security system in 1994 and 1995, and F 17 billion on account of the deficit of the régime général in 1996 (as projected at the time the reform was announced). This debt, which was initially owed to the Caisse des Dépôts et Consignations, was refinanced in the bond market by the middle of 1996. The debt of the CADES is recorded as part of the general government debt (as was previously the debt of the social security system).

18

RDS stands for remboursement de la dette sociale.

19

A more detailed description may be found in the accompanying paper on Selected Issues.

20

Improved information systems will be a key tool in implementing these policies: each type of medical service will be assigned a data processing code, and all patient files will be standardized and computerized to avoid duplication and abuse.

21

The average tax rate for a worker or family earning 133 percent of the average production worker income, for example, was at or above the average for the 6 largest industrial countries in 1992, irrespective of family composition; see The OECD Jobs Study: Taxation, Employment and Unemployment (Paris: OECD, 1995).

22

Taxation of labor incomes accounted for 22.5 percent of GDP in France, compared to an unweighted average of 12 percent of GDP for the 7 major industrial countries in 1990; see O’Callaghan, Gary, “The Taxation of Returns from Personal Savings in France,” in Paul Masson, ed., France: Financial and Real Sector Issues (Washington: International Monetary Fund, 1995).

23

See SM/95/266, pp. 22–23, for a description of this system.

24

See SM/95/251, p. 17 and SM/95/266, p. 9. for further information.

25

The report of the Commission, published on June 4, is commonly referred to as de la Martinière report, after the chairman of the Commission, a former director of the tax administration.

26

Horizontal equity refers to the equal treatment of households of equal incomes, taking into account family composition.

27

To offset the effect on those with low pensions, the right to deduction for those aged 65 and over would be extended to somewhat higher income levels.

28

The 10 percent deduction for professional expenses would be maintained.

29

This deduction is applied to salaries, pensions, and profits of centres de gestion agréés. Agricultural incomes, interest and dividend income, and incomes of professionals not associated with centres de gestion agréés are thereby excluded.

30

For life insurance contracts and contractual savings the report recommended, for new contracts: (1) to increase the normal duration of contracts from 8 to 10 years; (2) to submit early withdrawals to income taxation or (optionally) final withholding at the rate of 39.9 percent for withdrawals within 5 years (compared to 4 years under current legislation) and 19.9 percent for withdrawals after 5 to 10 years (compared to 4 and 8 currently); (3) in the case of life insurance, to fully remove the tax reduction equivalent to 25 percent of life insurance premia (thereby complementing measures taken in 1995) and to place limits to the exemption from succession rights; (4) in the case of contractual savings, to remove the exemption for interest income at normal expiration of the contract.

31

The Commission assumed that tax reductions under the IRG will be complemented by the elimination—when permitted by the budgetary situation—of the three temporary tax surcharges imposed in 1995, and gave the greatest urgency to the removal of the surcharges on the corporate profit tax and the value added tax.

32

This cost includes F 22 billion to offset the elimination of the décôte and the planned increase in the ceiling of the tranche taux zéro, and F 12 billion to adjust the rate schedule to compensate for the elimination of the 20 percent “general” deduction. Taking into account the fact that F 50 billion would be raised through the elimination of exemptions and deductions (Table 3), the cost of general rate reductions would amount to F 100 billion.

33

The Commission encouraged a new tax fashioned after the RDS, with a few adjustments to ensure equal treatment of liquid savings under the RDS and IRG. The RDS currently excludes only income from livret A and livret bleu savings accounts, income from comptes de dévelopement industries family allowances (this exemption is under review), and social minima.

34

Employment creation is not the main objective of the reform of health care financing. The shift from employee contributions to a broad-based income tax is unlikely to have important employment effects, as employer costs will not be affected directly, and for workers at the minimum wage will remain unchanged.

35

The Commission envisaged a reduction in the rate for salaried workers from their current contribution rate of 6.8 percent to the 4.5 percent final CMU rate, but recommended that these gains be conferred later.

36

Currently, medical insurance contribution rates on gross labor income are as follows: (1) 19.6 percent for salaried private sector employees, of which 6.8 paid by employees; (2) a regressive rate schedule applies for non-salaried workers (workers with incomes below 40 percent of a reference income make a flat contribution; additional incomes up to the reference income are taxed at the rate of 12.9 percent; incomes between the reference income and five times the reference income are taxed at a rate of 9.8 percent; no additional contribution is due on incomes above five times the reference income; and (3) from the beginning of 1997, 3.8 percent will be levied on basic pensions and 4.8 percent on supplementary pensions.

37

The Commission shies away from recommending changes in the tax base for the local business tax on account of the distributional changes this would imply. Shifting to value added as the new tax base would involve a shift in taxation from capital to labor and be detrimental to labor intensive industries, while also posing technical problems on account of the difficulties in defining value added for multi-plant firms. Similarly, a shift from the historical cost of investment to its economic value would favor old against new enterprises and industries.

38

The taxe professionelle is the source of 80 percent of the variance in potential tax revenues across localities.

39

See also the forthcoming supplement to SM/96/242.

40

Nonetheless, in cities with more than 100,000 residents, the average rate of property tax (taxe d’habitatiori) increased by 4.75 percent in 1996.

41

This agreement ties the rate of increase in state transfers to the rate of increase in the CPI (excluding tobacco).

42

The increased recourse to capital markets has fostered an improvement of the accounting of local authorities, which is gradually moving towards corporate standards.

43

This tax was introduced in 1975 to replace the existing local tax called patente. Its base is highly distortionary: in particular, physical investment was originally taxed at a very high and uneven (across sectors) rate; to address these problems in a partial manner, several exemptions have been adopted. A reform of the taxe professionelle was proposed in 1995, but not implemented.

44

Local government employment has increased by 20 percent since 1982.

45

The target for broad money—based on a non-accelerating-inflation growth rate of output of 2-3 percent and 2 percent inflation—has been given substantially less weight in the implementation of monetary policy than the exchange rate anchor.

46

Calls for tenders are made regularly, usually twice a week. Upon invitation by the Banque de France, 26 primary market operators (opérateurs principaux de marchés, OPM) submit bids specifying the amount and the interest rate offered. The Bank then announces an interest rate and the amount taken; bids with lower interest rates are discarded and all others are accepted at the chosen interest rate using a proportional rationing scheme.

47

At that time, the reserve ratio for sight deposits was lowered from 4.1 percent to 1 percent and the ratio for passbooks was halved to 1 percent. The ratio for time deposits with a maturity of less than one year was maintained at 0.5 percent, the rate set in 1990. Deposits with a maturity of more than one year continued to be exempt from reserves.

48

Codevi (Comptes pour le développement industriel) are saving accounts earmarked to finance industrial investment. The livret A and livret bleu are passbook savings accounts which have a ceiling.

49

Taxes on time deposits covered by M3-M2 were lowered in 1995 and brought into line with those applying to bond income.

50

The P1 aggregate includes long-term saving instruments such as contractual saving accounts, Housing Saving Plans, and People’s Saving Plans.

51

However, total domestic debt is not strongly correlated with nominal income (the correlation coefficient was less than 40 percent in 1987–94). Moreover, using Granger causality tests, the information in lagged total domestic debt adds little to the information in lagged nominal GDP.

52

Since the beginning of 1996, France has fully adhered to the presentation of the Fifth IMF Balance of Payments Manual. Figures for 1995 have been published in both the old and new presentations. Although there were also some modifications to the current account (e.g., several services were reclassified), the most important changes took place in what was previously known as the capital account and what is now called the “financial account”. In the new nomenclature, the “capital account” now covers only a relatively limited set of transactions (for example, debt write-offs).

53

American pension funds were among the major investors in the recent privatization of Pechiney.

54

In the old nomenclature these positions appear as short-term loans to foreigners.

55

These numbers are preliminary, as the Banque the France is still expanding the coverage of its foreign asset statistics to fully account for foreign direct investment (at the moment, the data cover only financial assets).

56

See SM/95/266 for a comprehensive overview of measures contained in this law.

57

For wages up to 1.3 times the minimum wage, there is a partial exemption amounting to a 50 percent reduction in family allowance contributions.

58

The reduction varies from FF 800 for a person earning the minimum wage (or 10 percent of labor costs) to zero at 1.2 times the minimum wage.

59

In addition, the minimum wage was adjusted automatically by 2 percent on May 1, 1996, corresponding to the increase in consumer prices, and by 0.34 percent on July 1, 1996, corresponding to half the increase in the average hourly wages of workers.

60

These enterprises (SNCF, RATP, Poste, France Télécom, Electricite de France, Gaz de France, Charbonnages de France), constitute the hard core of the public enterprises, employing some 825,000 people.

61

Wage policy in the public enterprises sector is set by the government; this power has been used in recent years to restrain wage growth in enterprises experiencing financial difficulties. Wage freezes were implemented at SNCF in 1993, at CGM in 1993 and 1994, at Air France between 1993 and 1996, and at GIAT in 1996.

62

In 1985, the publicly-owned sector accounted for 10.4 percent of total wage-earning employment, 20 percent of the country’s total value-added, and 35 percent of productive investment.

63

These funds were granted on condition that Air France would not increase the size of its fleet and that it would drastically reduce its workforce in preparation for privatization. Nevertheless, Air France plans to partially renew its fleet in 1997, despite complaints to the European Commission by competitors SAS, KLM, and Lufthansa regarding the capital injection.

64

The competition from AOM (which was owned by Crédit Lyonnais and is now under the control of CDR) further complicates the management of airlines owned directly or indirectly by the state.

65

It is not clear if the media and defense parts will be sold together or separately.

66

The government does not plan to change the civil-service-like status of France Telecom’s employees.

67

At the moment, there are only two private mobile phone companies and several closed business phone networks.

68

Details may be found in “France - Recent Economic Developments”, SM/266/95 (October 12, 1995).

69

These standards include the right of trade unions to organize, a prohibition of child labor, and a prohibition of employment discrimination.

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France: Recent Economic Developments
Author:
International Monetary Fund