France's recent economic performance has been distinctly positive, supported by policy reforms over a number of years and a favorable monetary and external environment. The fiscal deficit has narrowed significantly in recent years. Improving long-term economic performance depends crucially on significant reductions in France's high tax burden. Effective expenditure control over the medium term will depend on reforms of the civil service and of the major transfer programs, notably pensions. There has been notable progress in privatization, but less in opening up key network sectors.

Abstract

France's recent economic performance has been distinctly positive, supported by policy reforms over a number of years and a favorable monetary and external environment. The fiscal deficit has narrowed significantly in recent years. Improving long-term economic performance depends crucially on significant reductions in France's high tax burden. Effective expenditure control over the medium term will depend on reforms of the civil service and of the major transfer programs, notably pensions. There has been notable progress in privatization, but less in opening up key network sectors.

1. This supplement provides information on developments since the preparation of the staff report for the 2000 Article IV consultation with France (SM/00/217). In particular, it revisits the short-term economic outlook in light of the increase in world oil prices and of newly released data on economic activity, and reports on the 2001 draft budget proposal; a revised Public Information Notice (PIN) is also attached. The new information does not alter the thrust of the staff’s policy advice.

2. Though monetary conditions remain supportive, recent economic data have been somewhat weaker than assumed in the projection in the staff report. Despite official intervention to support the euro in late September and the 25 basis point increase in the ECB refinancing rate on October 5, monetary conditions have been broadly unchanged since earlier in the year. The staff retains the view that these conditions remain appropriately supportive of growth in France as in the euro area as a whole. National accounts data for the second quarter put quarterly real GDP growth at 0.7 percent, against a generally expected rate of about 1 percent. This outturn is primarily attributable to a deceleration in the growth of private consumption, particularly in the consumption of food items and energy products, the latter in response to rising oil prices. There is also the possibility, suggested by INSEE but difficult to confirm at this stage, that capacity constraints may be biting earlier than envisaged in the staff report. Industrial production growth slowed at mid-year, before rising again more recently, and business and consumer confidence have softened somewhat (Figure 1). The unemployment rate was 9.6 percent in August, little changed from a month earlier. Higher oil prices have raised headline consumer price inflation, which reached 2.3 percent in September; excluding energy, however, inflation has been broadly stable at about 1 percent, although it has inched up in recent months.

Figure 1.
Figure 1.

France: High Frequency Indicators

Citation: IMF Staff Country Reports 2000, 147; 10.5089/9781451813425.002.A002

Source: INSEE.

3. In light of these developments, the staff has revised the growth projection for 2000 and 2001 from 3½ percent to 3¼ percent (Table 1). Official and consensus growth forecasts are in a similar range. A factor that is likely to attenuate the domestic impact of higher oil prices in France1 is the extent of front-loading of the tax reduction: about two-thirds of the F 200 billion to be granted over 2000-2003, or 1.3 percent of GDP, is concentrated in 2000 and 2001. The oil price rise implies an upward revision of the forecast for consumer price inflation to 2 percent in 2000. Assuming oil prices average about $32 a barrel in the fourth quarter of this year and then decline gradually—the same assumption made in the supplement to the euro area paper, and a 10 percent increase in prices relative to the projection in the staff report—inflation is projected at 1½ percent in 2001. This forecast hinges on continued wage moderation, which currently appears to be a tenable assumption: wage conflicts in the private sector remain rare and there is no evidence of a pickup in nominal wages. There are risks, however, as wage claims appear to be intensifying in the public sector (railways, electricity and gas, and the civil service).

Table 1.

France: Main Economic Indicators

(Annual percentage change, unless otherwise indicated)

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Sources: Bank of France: data provided by the authorities; and Fund staff estimates.

Change as percentage of previous year’s GDP.

Harmonized CPI.

For 2000, year on year in September.

For 2000, year on year in June.

In percent of labor force; harmonized index.

GDP over total employment.

Personal disposable income deflated by the implicit deflator for private consumption.

In percent of household disposable income.

In percent of potential GDP.

Index. Base 1995-100. For 2000, data as of July.

In percent of GDP.

4. The 2000 general government deficit is now officially projected at 1.4 percent of GDP, with both expenditure and tax levels above those projected in the staff report. The deficit outcome compares favorably with the initial budget target of 1.8 percent of GDP, which was predicated on appreciably lower growth. Following the April supplementary budget, and the government’s commitment to devote all further revenue windfalls to deficit reduction, an even better outcome appeared feasible (underlying the deficit projection of 1.2 percent of GDP in the staff report). However, in the event, taxes on energy products were reduced and economic growth has slowed somewhat. In addition, there has been further slippage in health care spending (now projected to grow in real terms by 2.3 percent, compare to the target of 1.5 percent), an area that has in the past been a persistent source of overruns. Tax revenues are estimated to amount to 45.2 percent of GDP, a decline of 0.4 percentage points of GDP from the 1999 peak. This fall is less than projected at the time of the supplementary budget, when tax cuts of about 1 percent of GDP were expected to lead to a commensurate decline in the tax burden. All in all, the structural balance is projected to remain unchanged in 2000, at close to 1 percent of GDP.

5. The draft 2001 budget targets a general government deficit of 1 percent of GDP, improving on the Stability Program target but estimated to entail a slight deterioration in structural terms (Table 2).2 The budget is based on a central GDP growth projection of 3.3 percent, the mid-point of an unusually wide 3.0-3.6 percent range which is reflective of current uncertainties. Tax revenues are set to decline by ½ of 1 percent of GDP, as envisaged in the multiyear tax-reduction package. Total general government expenditures are set to increase in line with the Stability Program’s norm (1.3 percent in real terms). Pensions are to be raised by more than inflation for the first time since the 1993 reform: the increase will match both the unexpected rise in 2000 inflation and projected 2001 inflation, with an additional amount for low pensions. The main risks on the expenditure side stem from the public sector wage bill and, again, health care spending. There are pressures both for civil service wage increases and for the absorption into the public sector of young workers currently employed under the Emplois Jeunes program. Also, 11,000 workers are to have their contract status upgraded to become civil servants. As to health care spending, the draft budget recognizes the control difficulties by allowing for a real increase of 2.3 percent, putting at risk the achievement of the Stability Program’s target of a cumulative real increase of 4.5 percent in the three years to 2003. All in all, the deficit target for 2001 implies a deterioration in the structural balance of about ¼ of 1 percent of GDP.

Table 2.

France: Medium-Term Outlook for the Public Finances

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Source: Data provided by the authorities and staff calculations.

Based on the projections in the 2001 budget.

Receipts from the sale of third generation mobile phone licenses, amounting to about 1.1 percent of GDP, have not been included in the calculations.

In percent of potential output.

6. In sum, since the issuance of the staff report:

  • The near-term macroeconomic outlook has softened somewhat, but growth is expected to remain above estimated potential and core inflation to remain contained—subject to continued wage moderation. If wages begin to accelerate, however, stagflationary risks would be appreciably stronger. Indications that higher headline inflation, driven by oil prices, is intensifying wage demands in certain (essentially public) sectors, as well as the possible emergence of supply side bottlenecks, require policy attention. Government firmness in the face of public sector wage claims and flexibility in the implementation of the 35-hour work week will both be key to keeping the expansion on track.

  • The estimated fiscal outcome for 2000, and that budgeted for 2001, mark welcome improvements with respect to original targets, but structural deficit reduction remains elusive. Indeed, the estimated structural deficit for 2001 (slightly over 1 percent of GDP) would be the largest since EMU participation in 1999, despite strong growth in the intervening period. Achieving the staff recommendation of fiscal balance in 2002 and structural balance in 2003 will therefore require an intensified effort, but remains within reach under the current growth scenario.

1

The increase in oil prices between the projection in the staff report and this revised projection has resulted in a transfer of about 0.1 percent of GDP from France to oil exporters.

2

The deficit target excludes Universal Mobile Telephone Systems (UMTS) license receipts, expected to amount on a cash basis to F 32.5 billion in 2001 (0.3 percent of GDP; on the Eurostat methodology, which attributes the entire stream of proceeds to the year of the sale, these receipts amount to 1.1 percent of GDP in 2001). Of the cash revenues, F 18.5 billion are to be allocated to the pension reserve fund, and the remainder directly to debt reduction.

France: Staff Report for the 2000 Article IV Consultation
Author: International Monetary Fund