France: Staff Report for the 2004 Article IV Consultation Supplementary Information
Author: International Monetary Fund
Publication Date:
03 Nov 2004
eISBN:
9781451813463
Language:
English
Keywords:
ISCR; CR; deficit; reform; structural adjustment; GDP inflation; government; growth outlook; GDP transfer; reform scenario; growth projection; nominal growth; Health care reform; Budget planning and preparation; Health care spending; spending reform
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The staff report for the 2004 Article IV Consultation on France highlights economic performance and near-term outlook and policies. On structural issues, a health care reform has established the key instruments to gain control over the system’s budget. Ongoing civil service reform and decentralization are providing the opportunity to realize efficiency gains. Pension and health care reforms have improved the long-term fiscal outlook against the background of the impending demographic shock, while ongoing reforms in product markets are likely to boost growth.

Abstract

The staff report for the 2004 Article IV Consultation on France highlights economic performance and near-term outlook and policies. On structural issues, a health care reform has established the key instruments to gain control over the system’s budget. Ongoing civil service reform and decentralization are providing the opportunity to realize efficiency gains. Pension and health care reforms have improved the long-term fiscal outlook against the background of the impending demographic shock, while ongoing reforms in product markets are likely to boost growth.

1. This supplement to the staff report for the 2004 Article IV consultation with France provides an update on recent developments, in particular the authorities’ 2005 budget proposal and medium-term fiscal plans. The new information does not alter the thrust of the staff appraisal, but the structural adjustment underlying the draft 2005 budget falls well short of the amount envisaged in the Staff Report. Confidence surveys confirm the strength of domestic demand, but recent indicators are somewhat mixed, and the surge in oil prices has lowered the growth outlook. Despite the hike in oil prices, headline and underlying inflation (12-month rates) both eased in September to 2.2 percent and 1.6 percent, respectively. The draft 2005 budget aims to reduce the general government deficit to 2.9 percent of GDP, relying on higher growth and a substantial one-off measure (the move of the electricity utility’s pension fund assets and accompanying future liabilities to the central government). In other developments, in early October, the EU Court of Justice ruled that the French prohibition of paying interest on sight deposits represents a restriction to the freedom of establishment guaranteed by the EC Treaty. Finally, the Camdessus report—to be issued on October 15—is expected to contain comprehensive recommendations on how to lift obstacles to growth, and the authorities have indicated their intention to draw on it for action.

2. The budget foresees steady growth of 2.5 percent in both 2004 and 2005, with domestic demand sustaining the recovery. 1 The staff now expects a deceleration in 2005 to 2.2 percent, reflecting a new, higher oil price baseline (Table 1).2 Recent data releases are somewhat mixed. Overall consumer and business confidence improved, stocks are below their average levels, and perceived inflation has been falling towards the actual rate, lately possibly influenced by the announcement of price cuts by large retailers. However, employment has so far failed to pick up, nonenergy industrial production growth slowed significantly in August, and the trade balance posted a large deficit.

Table 1.

France: Main Economic Indicators, 2000-09

(Annual percentage change, unless otherwise indicated)

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

Data from the INSEE quarterly national accounts system.

Change as percentage of previous year’s GDP.

Harmonized CPI.

For 2004, year on year, September.

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 2000=100.

In percent of GDP; data for 2001-02 exclude the proceeds from the sale of UMTS licenses, which amount to about 0.1 percent of GDP; data for 2005 exclude the EDF pension fund transfer (0.4 percent of GDP).

3. The budget proposal aims to reduce the deficit from 3.6 percent of GDP in 2004 to 2.9 percent of GDP in 2005, through expenditure restraint at the central government level, savings from the health care reform, and the transfer of the electricity company (EDF) pension fund. The 2005 objective remains, as previously announced, that of reducing the general government deficit to below 3 percent of GDP—specifically to 2.9 percent of GDP. Achievement of this target is facilitated by a 0.4 percentage point of GDP transfer of the EDF pension fund (“soulte”) to the central government, as part of the reform of the company’s statute (¶26 of the Staff Report). Real expenditure growth is planned to be held at 1.6 percent in 2005, the same rate as estimated for 2004, based on a projected deceleration of nominal growth in health care spending from 5.2 percent to 3.2 percent and constant real spending at the central government level. The number of civil servants is to be reduced by 7,200, corresponding to a replacement of about 7 out of 8 retirees (some 60,000 civil servants are due to retire in 2005, as the wave of retirements begins in earnest). On the revenue side, the exemption of new investments from the taxe professionnelle has been extended until end-2005, the corporate income tax rate will decrease marginally, and the earned income tax credit (PPE) will rise by 4 percent. The budget also includes a number of small tax cuts and various new tax exemptions. Notwithstanding these revenue cuts, the tax burden rises marginally due to the increases in social security contributions introduced by the health care reform. The 2005 budget also takes further steps in the progressive implementation of the 2001 organic budget law, with an emphasis on objectives, outputs, and quantitative performance indicators, which should increase transparency and accountability.3 Finally, a modification to the organic law has been proposed requiring that each budget law contain an ex ante specification of the use of any revenue windfalls. The initial proposal—that the majority be devoted to debt reduction and the remainder to temporary tax cuts or investment spending (¶20 of the Staff Report)—was considered by the relevant legal authority (Conseil d’État) as too specific for an organic law. How any windfalls would be allocated in 2005 is currently under discussion.

4. Over the medium term (2006–08), the authorities reaffirm the intention to improve the structural balance by about 0.5 percentage point of GDP per year. GDP is assumed to grow by 2.5 percent per year (0.25 percentage point above the authorities’ estimate of potential growth), and overall real expenditure is targeted to grow by 1.2 percent per year on average. The recent health care reform is expected to limit nominal growth of health spending to 3.6 percent per year during 2006–08. With unemployment assumed to decline gradually, the budget reaffirms the target of balancing the social security accounts by 2007. The authorities estimate the total underlying adjustment at about 2 percentage points of GDP over the four years 2005–08, bringing the general government structural deficit to just below 1 percent of GDP by the end of the period; staff estimates differ as per the text table below.

France: 2005 Budget and Medium-Term Fiscal Plans

(In percent of GDP)

article image

The authorities count on an increase in nontax revenue over 2006-08, which the staff did not incorporate.

Sources: Projet de loi de finances 2005; Perspectives Economiques 2004-05; and IMF staff calculations.

5. The draft 2005 budget falls short of the staff’s recommended substantial structural adjustment, especially since it is not accompanied by further significant growth-enhancing reforms or durable spending restraint. As regards the nominal deficit, there is sufficient room to achieve the authorities’ target of 2.9 percent of GDP with only marginal additional measures, even under the staff’s lower growth projections which yield a revised deficit estimate of 3.0 percent of GDP.4 More importantly, though, the structural effort (excluding the EDF soulte) amounts to less than ¼ percent of GDP, about ½ percent of GDP less than staff advice.5 The reduction in the number of civil servants is welcome in a historical perspective, as it confirms a turnaround in a long-standing trend of expanding public sector employment, but it remains limited against the background of the large size and cost of public employment in France (Figure 1). The health care reform is an important step toward longer-term fiscal sustainability. Ensuring early savings would, however, have required advancing or strengthening some of its measures—without which staff remains skeptical about the viability of reducing nominal health care spending growth to 3.2 percent in 2005. On the revenue side, the suspension of earlier plans for further income tax cuts is well-placed and in line with staff advice; at the same time, the budget contains a number of small tax cuts and exemptions that are likely to have little sustained effects on growth and employment and, contrary to announced intentions, increase tax niches.

Figure 1.
Figure 1.

France: Public Employment Indicators

(In percent)

Citation: IMF Staff Country Reports 2004, 343; 10.5089/9781451813463.002.A002

Source: OECD, Analytical Database.

6. Insufficient up-front adjustment increases the need to put in place concrete and strengthened measures to achieve the underlying fiscal adjustment planned by 2008. Under the staff’s projections, an additional 1 percentage point of GDP of structural effort (excluding one-offs) will be necessary compared to the authorities’ intentions, even in a strong reform scenario.6 Given a record of spending overruns in social security and without more comprehensive spending reforms, there remain doubts about the feasibility of achieving the targeted slowdown in expenditure growth. In addition, because of reliance on a large one-off measure in 2005, the underlying structural adjustment implied by the authorities’ medium-term path is more challenging than it appears, particularly in 2006.

1

The authorities’ estimate is calendar-day adjusted; with 2004 having 255 working days compared to 252 in 2003, actual nonadjusted growth could be 0.2–0.3 percentage points higher. The staffs 2004 projection includes a 0.2 percentage point calendar effect.

2

The WEO convention is to revise the oil price baseline once future prices on a weighted index of different types of oil deviate by 10 percent from the previous assumption for more than ten days.

3

The update of the fiscal transparency ROSC (SM/04/344 of September 30, 2004) provides further details.

4

Compared to the authorities, the staff deficit projection of 3.0 percent of GDP in 2005 reflects lower real GDP growth and higher health spending growth which raise the deficit, but also a higher GDP deflator, which lowers it.

5

In November 2003, the Ecofin Council recommended under the SGP’s excessive deficit procedure that France reduce its cyclically-adjusted deficit by 0.8 percentage point of GDP in 2004 and at least 0.6 percentage point of GDP in 2005 for a cumulative 1.4 percentage point of GDP.

6

The reform scenario is described in the Staff Report’s Text Table 1, “B. Fiscal sustainability: reform and consolidation,” page 16.

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Cover IMF Staff Country Reports
France: Staff Report for the 2004 Article IV Consultation
Author: International Monetary Fund
Volume/Issue:
Volume 2004: Issue 343
Publisher:
International Monetary Fund
ISBN:
9781451813463
ISSN:
1934-7685
Pages:
51
DOI:
https://doi.org/10.5089/9781451813463.002

France: Public Employment Indicators

(In percent)