Abstract
This Selected Issues paper examines external developments and competitiveness in France. Over the past decade, the current account has deteriorated from a surplus of 1.2 percent of GDP in 2002 to a deficit of about 2.3 percent in 2012, as France lost ground in goods trade and services recorded just a slight increase in global market shares. The slight improvement of the trade deficit seen in 2012 may suggest a change in trend, although it is still too early to determine. Past deterioration in export performance points to competitiveness weaknesses, rooted in significant rigidities in labor and product markets.
Which Expenditure Saving to Sustain Medium-Term Fiscal Consolidation?1
1. Much of the fiscal imbalance that was opened during the crisis has been corrected, but the structural fiscal deficit still stood at 3.5 percent of GDP in 2012.2 France’s fiscal deficit widened markedly during the crisis (from 2.7 percent of GDP in 2007 to 7.5 percent of GDP in 2009). Automatic stabilizers contributed to about 2/3 of this deterioration, with the rest coming from a discretionary fiscal stimulus. Thus, over the same period, the structural fiscal balance widened by 1.5 percent of GDP. The fiscal consolidation undertaken since 2010 reduced the structural imbalance by just over 2 percentage points of GDP by 2012, with an additional adjustment of nearly 2 percentage points projected for 2013. An additional adjustment of 1.7 percent of GDP will be needed to meet the government medium term objective of a balanced structural position.
2. The Stability Program of April 2013 envisions that fiscal consolidation, which has so far relied mostly on revenue measures, will shift to expenditure containment. The tax-to-GDP ratio increased by 3 points over 2009-12 and is projected to increase by one additional point in 2013. In contrast, the expenditure-to-GDP ratio, which had increased by over 4 points between 2007 and 2009, has remained at its peak level of close to 57 percent of GDP and is the largest in the euro area (Figure 1)3. The increase in the expenditure ratio during the crisis is not fully cyclical as almost 1/3 is due to structural spending increases. Going forward, the authorities intend to shift from revenue-based consolidation to expenditure-based consolidation. The share of revenue measures in the structural adjustment should decline from 85 percent in 2012 to 79 percent in 2013 and to 33 percent in 2014. In 2015 and 2016, the structural adjustment would come entirely from expenditure containment.
France: Main Fiscal Indicators
(2000-2013, in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff projections.France: Main Fiscal Indicators
(2000-2013, in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff projections.France: Main Fiscal Indicators
(2000-2013, in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff projections.3. The purpose of this paper is to identify the areas of expenditure saving that could sustain medium term fiscal consolidation. The first section discusses the size of the fiscal adjustment needed to meet the objective of a balanced budget. The second section draws lessons from international experience with fiscal consolidation for the design of an expenditure-based consolidation in France. The last section identifies possible areas of expenditure saving.
A. A Historically Large Adjustment
4. To reach their medium-term fiscal objective, the authorities estimate that they will have to reduce the spending-to-GDP ratio by about 3 percentage points during 2013–17 (République Française, 2013). Under the authorities’ macroeconomic projection, such reduction in the expenditure ratio implies a structural adjustment of close to 2½ percent of GDP and would deliver a structural surplus of 0.5 percent in 2017. Under IMF staff’s macroeconomic framework and potential growth, the same reduction in the expenditure ratio would balance the structural budget and would require a structural adjustment of close to 2 percent of GDP.
5. Such a reduction is large by historical standards. Figure 2 shows periods of declining expenditure-to-GDP ratio shaded in green. In the past 35 years, the largest reduction in the expenditure-to-GDP ratio reductions amounted to 3 points between 1986 and 1989 and 2.8 points between 1996 and 2001.
France - General Government Spending (left axis, in percent of GDP) and Real Growth (right axis, in percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE, Devries et al. (2011), and Author’s calculation.Note: Shaded in green are periods of decline in the expenditure-to-GDP ratio, in red are the periods of policy-driven spending cuts.France - General Government Spending (left axis, in percent of GDP) and Real Growth (right axis, in percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE, Devries et al. (2011), and Author’s calculation.Note: Shaded in green are periods of decline in the expenditure-to-GDP ratio, in red are the periods of policy-driven spending cuts.France - General Government Spending (left axis, in percent of GDP) and Real Growth (right axis, in percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE, Devries et al. (2011), and Author’s calculation.Note: Shaded in green are periods of decline in the expenditure-to-GDP ratio, in red are the periods of policy-driven spending cuts.6. More than in the past, the reduction in the expenditure ratio will have to come from discretionary expenditure saving. The red shaded areas of Figure 2 show that policy measures were short lived. They explain only 0.76 point of the 3 points reduction in the expenditure ratio during 1986-89 and 0.56 points of the 2.8 point reduction in 1996-2001. In other terms, the drop in the expenditure ratio was achieved without substantial expenditure containment: real structural primary expenditure grew on average by 2.0 percent a year in the two periods that is only below their average growth rate of 2.5 percent during 1981-2007. Rather, the main reasons for the reduction in the expenditure ratios were strong economic growth (3.4 percent on average during 1986-89 and 2.6 percent during 1996-2001) and inflation. Nominal GDP grew by 7.1 percent on average during 1986-1989 and 3.8 percent during 1996-2001. This is much more than what can be expected in the coming years. The French authorities expect, on average, a real growth of 1.5 percent over 2013-17 (1.1 percent in IMF staff scenario) and a nominal GDP growth of 3.2 percent (2.8 percent in IMF staff scenario). Therefore, more than in the past, the reduction in the expenditure ratio will have to come from discretionary expenditure saving.
7. Although large, a 3 points reduction in the expenditure ratio is achievable. To put the effort in perspective, reducing the expenditure ratio by 3 points would only bring it back 1 point above its 2008 level. Moreover, other European countries have managed to do more while preserving their social model (Figures 3 and 4). In two years (1995-97), Austria reduced its expenditure-to-GDP ratio by 5.6 points, 2.7 percentage points of which was due to policy measures. Between 1993 and 2001, Finland reduced its expenditure ratio by 17 points. In the first four years, the reduction reached 8.7 points of which 7.5 points were policy driven. Between 1992 and 1998, Sweden reduced its ratio by 11.4 points of which 6.8 points were due to policy measures (Table 1). Norway is another example of substantial adjustment, even if less steady. In all cases, the fiscal balance improved significantly. In the Scandinavian countries, it shifted from substantial deficits to surpluses. Moreover, the debt-to-GDP ratio was stabilized or substantially reduced putting these countries in a better position to face the fiscal impact of the current crisis.
General Government Spending
(In percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: Eurostat.General Government Spending
(In percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: Eurostat.General Government Spending
(In percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: Eurostat.
Impact of Past Expenditure Cuts
(in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: IMF, WEO.Impact of Past Expenditure Cuts
(in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: IMF, WEO.Impact of Past Expenditure Cuts
(in percent of GDP)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: IMF, WEO.Discretionary Budget Measures in Recent Fiscal Adjustment
Discretionary Budget Measures in Recent Fiscal Adjustment
| Total | Revenues | Expenditures | ||
| Austria | 1996 | 2.41 | 0.88 | 1.53 |
| 1997 | 1.56 | 0.44 | 1.12 | |
| 2001 | 1.02 | 0.90 | 0.12 | |
| 2002 | 0.55 | 0.00 | 0.55 | |
| Composition | 40 percent | 60 percent | ||
| Finland | 1992 | 0.91 | 0.00 | 0.91 |
| 1993 | 3.71 | 0.00 | 3.71 | |
| 1994 | 3.46 | 0.69 | 2.77 | |
| 1995 | 1.65 | -0.63 | 2.28 | |
| 1996 | 1.47 | 0.00 | 1.47 | |
| 1997 | 0.23 | -0.70 | 0.93 | |
| 1998 | 0.00 | 0.00 | 0.00 | |
| 1999 | 0.00 | 0.00 | 0.00 | |
| Composition | -6 percent | 106 percent | ||
| Sweden | 1993 | 1.81 | 0.42 | 1.39 |
| 1994 | 0.78 | 0.19 | 0.59 | |
| 1995 | 3.50 | 1.40 | 2.10 | |
| 1996 | 2.00 | 0.80 | 1.20 | |
| 1997 | 1.50 | 0.60 | 0.90 | |
| 1998 | 1.00 | 0.40 | 0.60 | |
| Composition | 36 percent | 64 percent |
Discretionary Budget Measures in Recent Fiscal Adjustment
| Total | Revenues | Expenditures | ||
| Austria | 1996 | 2.41 | 0.88 | 1.53 |
| 1997 | 1.56 | 0.44 | 1.12 | |
| 2001 | 1.02 | 0.90 | 0.12 | |
| 2002 | 0.55 | 0.00 | 0.55 | |
| Composition | 40 percent | 60 percent | ||
| Finland | 1992 | 0.91 | 0.00 | 0.91 |
| 1993 | 3.71 | 0.00 | 3.71 | |
| 1994 | 3.46 | 0.69 | 2.77 | |
| 1995 | 1.65 | -0.63 | 2.28 | |
| 1996 | 1.47 | 0.00 | 1.47 | |
| 1997 | 0.23 | -0.70 | 0.93 | |
| 1998 | 0.00 | 0.00 | 0.00 | |
| 1999 | 0.00 | 0.00 | 0.00 | |
| Composition | -6 percent | 106 percent | ||
| Sweden | 1993 | 1.81 | 0.42 | 1.39 |
| 1994 | 0.78 | 0.19 | 0.59 | |
| 1995 | 3.50 | 1.40 | 2.10 | |
| 1996 | 2.00 | 0.80 | 1.20 | |
| 1997 | 1.50 | 0.60 | 0.90 | |
| 1998 | 1.00 | 0.40 | 0.60 | |
| Composition | 36 percent | 64 percent |
B. What Makes a Successful Fiscal Consolidation?
8. Based on the findings of empirical literature and on the case of Sweden, this section draws five lessons for the design of fiscal consolidation in France. A large empirical literature has looked at past international experience with fiscal adjustment. Through econometric work, it has aimed at identifying the factors that are more conducive to a successful consolidation (notably looking at the composition of the adjustment) and its sustainability over the medium term.
9. First, empirical literature finds that expenditure-based consolidations have been more successful than revenue-based consolidations (Alesina and Ardagna, 1998 and 2009; Barrios et al., 2010; Broadbent and Daly, 2010; Guichard et al., 2007; Hauptmeier et al., 2007; Molnar, 2012; and von Hagen et al., 2002). However, revenue measures can also have a role to play in fiscal consolidation if there is room to increase the revenue-to-GDP ratio or to reduce inefficient tax spending and if the taxes less harmful for growth (such as environmental taxes, property taxes, and value-added taxes) are used (Tsibouris et al., 2006).
10. In practice, countries have relied on a mix of expenditure and revenue measures (Table 1). Based on the experience of Sweden in the 1990s, the Swedish Finance Minister Borg (2010) stated that: “to be credible, the government must use all means available, which implies increasing taxes and reducing spending. Only focusing on expenditure cuts would excessively harm socio-economically disadvantaged groups, who rely extensively on the social programmes that would inevitably suffer. This is neither politically desirable nor politically acceptable. Only relying on tax hikes would massively distort incentives to work. Moreover, empirical evidence shows that fiscal consolidation based solely on higher taxes is not as effective and does not create as lasting effects as a balanced consolidation, with sizeable expenditure reductions. The key is hence to find an appropriate balance between tax and expenditure adjustments.” Although the exact split between revenue and expenditure measures is subject to debate (see note in Table 1) the decline of the expenditure-to-GDP ratio in Sweden far exceeded the decline in the revenue-to-GDP ratio (EEAG, 2012).
11. France planned medium term adjustment also relies on a mix of expenditure and revenue measures. The authorities’ plan to shift the fiscal adjustment toward expenditure containment is intended to achieve a roughly equal balance over the medium term, between revenue and expenditure measures. It also reflects the fact that the tax-to-GDP ratio is already high by international standard, and that margins to raise taxes that are less harmful for growth have already been partly exploited, e.g., property tax (Norregaard, 2013), and the increase in VAT and environmental taxes expected in 2014.
12. Second, econometric studies of past adjustments highlight that reducing the government wage bill and social expenditure is the most conducive to a successful consolidation (Alesina and Ardagna, 2009; Alesina and Perotti, 1995 and 1997; Bermperoglou et al., 2013; Hernández de Cos and Moral-Benito, 2011; Guichard et al., 2007; Molnar, 2012; and von Hagen et al., 2002). Molnar (2012) cautions that the specific spending cut matters for the size of the consolidation with cuts on social protection and housing and community amenities boosting the size of the consolidation. Hauptmeier et al. (1997) emphasize that ambitious reforms tend to focus the cuts on transfers, subsidies, and public consumption.
13. Third, the composition of the adjustment is also crucial for the persistence of multi-year adjustments. The reasons why reducing the wage bill and social expenditure are more conducive to a successful consolidation may be that they can be more easily sustained in the medium term than other types of spending cuts. Once implemented, pressures to reverse cuts in the wage bill and social spending may be limited, especially if accompanied with reforms that increase efficiency. By contrast, other types of expenditure are more likely to be reversed because they are more damaging for growth and cannot be sustained indefinitely, e.g. investment (Broadbent and Daly, 2010). Indeed, reducing the government wage bill and social spending are also found to have a comparatively smaller adverse impact on growth making them easier to sustain. Estimated fiscal multipliers for France suggest that trimming down transfers to households will have the smallest immediate impact on growth followed by public consumption cuts while investment cuts would have the largest impact (Table 2). Consistent with this, Bermperoglou et al. (2013) find in an analysis on four advanced economies that public investment cuts have been associated with output losses and increases in unemployment. They also find that a reduction in the wage bill would have the same outcome if achieved through vacancy cuts but would not imply output losses and can even be expansionary and reduce unemployment if achieved by wage cuts.
France: Estimated Short-Term Fiscal Multipliers
France: Estimated Short-Term Fiscal Multipliers
| Transfers to households | Public consumption | Public Investment | Total public spending | |
|---|---|---|---|---|
| OECD (2013) | 0.6 | 0.8 | 1.0 | |
| Barell et al. (2012) | 0.3 | 0.7 | 0.7 (2 during recession) | |
| Klein and Simon (2010) | 1.1 | |||
| Batini et al. (2012) | 2.1 during recession | |||
| Biau and Girard (2005) | 1.4 | |||
| Bouthevillain and Dufénot (2010) | 0.4 | |||
| Créel et al. (2011) | 1.0 | |||
| Marcellino (2002) | 0.8 |
France: Estimated Short-Term Fiscal Multipliers
| Transfers to households | Public consumption | Public Investment | Total public spending | |
|---|---|---|---|---|
| OECD (2013) | 0.6 | 0.8 | 1.0 | |
| Barell et al. (2012) | 0.3 | 0.7 | 0.7 (2 during recession) | |
| Klein and Simon (2010) | 1.1 | |||
| Batini et al. (2012) | 2.1 during recession | |||
| Biau and Girard (2005) | 1.4 | |||
| Bouthevillain and Dufénot (2010) | 0.4 | |||
| Créel et al. (2011) | 1.0 | |||
| Marcellino (2002) | 0.8 |
14. Supporting this economic rationale, the findings of the empirical literature show that the composition of an adjustment is a key determinant of its persistence. International experience shows that the longer a fiscal consolidation lasts, the greater the likelihood of a reversal (von Hagen et al., 2002; Ahrend et al.; and 2006, Guichard et al., 2007). The risk of an adjustment fatigue should not be underestimated in the case of France, which has been implementing a fiscal adjustment since 2011 and plans to do so until 2016-17. However, the design and the composition of the adjustment matters for its sustainability. For example:
Alesina and Perotti (1995) find that adjustments that reduce the deficit mainly by cutting social expenditure and the wage bill are the more persistent. In contrast, adjustments that rely primarily on labor-tax increases and on capital-spending cuts do not last.
Von Hagen, et al. (2002) find that expenditure-based adjustments are more likely to last than revenue-based adjustments. Consistent with this result, they also find that (1) a fiscal consolidation starting with rising taxes and later switching to reduced spending (i.e., the strategy followed by the French authorities) is less likely to be sustained than a consistently expenditure-based consolidation and (2) fiscal adjustments undertaken when the economy is recovering or when there is a tightening fiscal stance in other countries have more chances to be sustained because in this context “governments tend to turn to expenditure cuts rather than raising taxes to achieve budgetary consolidations.”
As credibility and predictability are crucial for the sustainability of any medium-term policy, concrete measures should be announced as early as possible in the adjustment process, For this reason, half of all saving undertaken by Sweden were decided in 1994.
15. The experience of Sweden, which managed to preserve a generous welfare state while compressing social spending, provides additional useful lessons on the composition of a successful and sustainable adjustment. Finance Minister Borg (2010 and 2011) emphasizes that spending cuts though necessary should be selective. Spending that enhances growth and employment prospects, such as education, professional training, key public investments and infrastructure projects, as well as research and development spending should be preserved.4 Moreover, spending cuts should be designed to boost incentives to work and join the labor force. In practice, this means that spending cuts should aim at eliminating unemployment traps and at encouraging people to work more and stay longer in the workforce by starting working at an earlier age and retiring later.5 As part of this approach, half of the 15.6 percent drop in Sweden’s expenditure ratio between 1993 and 2001 came from reduced transfer payments (pensions, early retirement benefits, housing subsidies, and social and unemployment insurance) and the other half from government consumption (Borg, 2010 and Hauptmeier et al., 2007).6 This represented a substantial effort with social benefit spending declining in real terms (Figure 5). Another crucial factor in Sweden’s successful fiscal consolidation was that it was backed by structural reforms. Social protection programs were evaluated with a view to identify how they could be reformed in order to increase incentives to work and to increase their targeting. Tax reform and labor market reforms (though late in the fiscal consolidation process) were also undertaken to further increase incentives to join (or stay longer in) the labor force.
Sweden: Real Growth in Expenditures
(In percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: WEO and Author’s calculation.Sweden: Real Growth in Expenditures
(In percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: WEO and Author’s calculation.Sweden: Real Growth in Expenditures
(In percent)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: WEO and Author’s calculation.16. Fourth, a consolidation by the sub-national governments tends to increase the probability of success of a fiscal adjustment initiated by the central government (Molnar, 2012). Though, literature does not identify a consistent role of sub-national government in the success of consolidation episodes, it appears crucial in the case of France for several reasons. As emphasized by the Cour des comptes (2012), a consolidation in the amount of 3 percent of GDP cannot be achieved only by the central government. Because central government spending is limited to about 15 percent of GDP and 27 percent of General Government spending, other levels of government (including the social security system) should share the burden of the adjustment.
17. Finally, if fiscal consolidation needs to be undertaken in difficult times, it should be accompanied by structural reforms that will foster growth as rapidly as possible. Economic growth has been a crucial element of successful fiscal adjustments. Finland and Sweden started a large multi-year fiscal consolidation in the 1990s when their output gap ranged between 2 and 4 percent (Baker, 2010).7 However, growth picked up early because a substantial depreciation implemented before the start of the fiscal consolidation and wage moderation during the adjustment allowed Sweden and Finland to seize the opportunity of a strong export demand. A fall in interest rates further fostered growth. At about 3 percent in 2013, France’s output gap is similar to the one Sweden and Finland8 had when they embarked on their fiscal consolidation. However, France cannot count on external demand to offset the contractionary impact of fiscal consolidation: its major export markets are experiencing low growth and exports accounts for a smaller share in France’s GDP than in Sweden or Finland. Furthermore, France cannot expect a significant drop in interest rates which are currently at historically low levels. In this context structural reforms are thus the main lever of growth, notably through a deepening of labor market reforms and opening of product and services markets to greater competition which are an important lever of productivity growth and employment creation.
C. Which Expenditure Saving Should France Consider?
18. Although the French authorities announced their intention to reduce expenditures, the specific measures that have so far been announced cover only a small part of the needed expenditure adjustment. International experience, described in the previous section, suggests that targeting social spending and the wage bill would be both the most conducive to a successful fiscal adjustment and the least damaging for growth. Focusing expenditure saving on social spending appears warranted in France for three main reasons.
First, no OECD country spends more on social protection than France. At about 32 percent of GDP, social expenditure are 6 percent of GDP higher than in Germany, 4 percent of GDP higher than in Sweden and Austria, and 10.5 percent of GDP higher than the OECD average (Figure 6). They account for 56.5 percent of the General Government spending (up from 50 percent in 1978).
Second, social spending has grown steadily in France. From about 25 percent of GDP in 1990, public social spending reached 30 percent before the crisis and 32 percent since 2009 (Figure 7). Social spending is the main reason of the increase in the expenditure ratio. While other countries have started rolling back the increase in social expenditure that took place in all countries in 2009, France share of social spending has remained stable at its peak level. Therefore, it appears possible to roll back some of the recent increases without jeopardizing the French social model, which would remain one of the most generous in the OECD.
Third, if accompanied by reforms to increase their efficiency, savings in social spending would not necessarily reduce their social and redistributive impact, notably if means tested. The reason is that, in some areas such as health, education, professional training or housing, some countries who spend less achieve better outcomes (in terms of performance indicators) than France. Efficiency issues are well documented (Cour des comptes, 2012 and 2013; Egert, 2013; European Commission, 2012; Grigoli, 2012; Migaud, 2012 and 2013; and OECD, 2013) and are reflected in the poor rating France receives by the World Economic Forum (2012) in terms of “wastefulness of government spending”: France ranks 77th out of 144 countries well below Switzerland (7th), Sweden (8th), Finland (9th), the Netherlands (13th), Germany (28th) or Belgium (46th) but above Spain (106th) and Italy (126th)9. A recent OECD study concludes that: “taxes and cash transfers reduce income inequality in France more than elsewhere in the OECD, because of the large size of the flows involved. But the system is complex overall. Its effectiveness could be enhanced in many ways, for example so as to achieve the same amount of redistribution at lower cost. […] the system of social and family benefits should be simplified to enhance transparency and consistency. Eliminating schemes that let people leave the labour market early, abolishing the pension privileges of specific occupational groups and internalising the costs of survivors’ pension benefits would increase fairness while at the same time generating savings. Better labour-market performance would result from increasing job-search incentives and shortening the parental leave allowance” (Égert, 2013).
Public and Private Social Expenditure
(In percent of GDP in 2009)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.Public and Private Social Expenditure
(In percent of GDP in 2009)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.Public and Private Social Expenditure
(In percent of GDP in 2009)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.
Public Social Spending in Selected OECD Countries
(In percent of GDP, 1985-2012)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.Public Social Spending in Selected OECD Countries
(In percent of GDP, 1985-2012)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.Public Social Spending in Selected OECD Countries
(In percent of GDP, 1985-2012)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Source: OECD Social Expenditure Database.19. Pensions are by far the largest social expenditure in France. For all broad categories of social spending, France spends more than the average OECD, but expenditure on pensions stands out (Table 3). No OECD country, except Italy, spends as much on pensions.10 At 13.7 percent of GDP, spending on pensions is about 6 percent of GDP higher than the OECD average. The reason is not demographic11 but rather the decision to direct a large share of social spending to the elderly (France ranks 4th in the share of public social and education expenditures dedicated to the elderly; at 48.7 percent that is 10 points more than the OECD average). The French pension regime is generous. At 62, the legal retirement age is the lowest in the OECD. In most OECD countries it is set at 65 and can go up to 6812. Moreover, life expectancy after pensionable age is high (in 2010 it reached 21.7 years, 3.2 years longer than the average OECD) and, before the last reform, it was rising fast (three decades ago it was about 8 years shorter and below the OECD average - OECD, 2011).
France: Public Social Expenditure by Broad Social Policy Area
(In percentage of GDP, in 2010)1
Countries are ranked by decreasing order of public social expenditure as a percentage of GDP.
Income support to the working-age population refers to spending on: incapacity benefits, family cash benefits, unemployment and other social policy areas categories.
France: Public Social Expenditure by Broad Social Policy Area
(In percentage of GDP, in 2010)1
| Pensions (old age and survivors) | Health | Income support to the working- age population2/ | Other social services | Active Labor Market Programs | Total | |
|---|---|---|---|---|---|---|
| France | 13.7 | 9.0 | 5.2 | 3.2 | 1.0 | 32.1 |
| Denmark | 6.1 | 7.7 | 7.9 | 6.9 | 1.6 | 30.2 |
| Sweden | 8.2 | 7.3 | 5.5 | 7.7 | 1.1 | 29.8 |
| Belgium | 10.0 | 8.1 | 8.1 | 2.1 | 1.4 | 29.7 |
| Finland | 9.9 | 6.8 | 7.1 | 4.7 | 0.9 | 29.4 |
| Austria | 13.5 | 7.3 | 5.8 | 1.7 | 0.8 | 29.1 |
| Germany | 11.3 | 8.6 | 4.4 | 2.5 | 1.0 | 27.8 |
| Italy | 15.4 | 7.4 | 3.4 | 1.1 | 0.4 | 27.8 |
| Spain | 9.3 | 7.0 | 6.8 | 2.0 | 0.9 | 26.0 |
| United Kingdom | 6.2 | 8.1 | 5.6 | 3.9 | 0.3 | 24.1 |
| Luxembourg | 7.7 | 6.6 | 6.8 | 2.0 | 0.5 | 23.6 |
| Norway | 5.4 | 6.2 | 6.3 | 5.0 | 0.5 | 23.3 |
| Netherlands | 5.1 | 7.9 | 6.3 | 2.7 | 1.2 | 23.2 |
| OECD(34) | 7.8 | 6.6 | 4.8 | 2.4 | 0.5 | 22.1 |
| Czech Republic | 8.3 | 6.7 | 4.4 | 1.1 | 0.2 | 20.7 |
| Canada | 4.5 | 8.0 | 5.4 | 0.9 | 0.3 | 19.2 |
| Australia | 3.5 | 6.2 | 4.5 | 3.3 | 0.3 | 17.8 |
| Korea | 2.1 | 4.0 | 1.3 | 1.5 | 0.4 | 9.4 |
Countries are ranked by decreasing order of public social expenditure as a percentage of GDP.
Income support to the working-age population refers to spending on: incapacity benefits, family cash benefits, unemployment and other social policy areas categories.
France: Public Social Expenditure by Broad Social Policy Area
(In percentage of GDP, in 2010)1
| Pensions (old age and survivors) | Health | Income support to the working- age population2/ | Other social services | Active Labor Market Programs | Total | |
|---|---|---|---|---|---|---|
| France | 13.7 | 9.0 | 5.2 | 3.2 | 1.0 | 32.1 |
| Denmark | 6.1 | 7.7 | 7.9 | 6.9 | 1.6 | 30.2 |
| Sweden | 8.2 | 7.3 | 5.5 | 7.7 | 1.1 | 29.8 |
| Belgium | 10.0 | 8.1 | 8.1 | 2.1 | 1.4 | 29.7 |
| Finland | 9.9 | 6.8 | 7.1 | 4.7 | 0.9 | 29.4 |
| Austria | 13.5 | 7.3 | 5.8 | 1.7 | 0.8 | 29.1 |
| Germany | 11.3 | 8.6 | 4.4 | 2.5 | 1.0 | 27.8 |
| Italy | 15.4 | 7.4 | 3.4 | 1.1 | 0.4 | 27.8 |
| Spain | 9.3 | 7.0 | 6.8 | 2.0 | 0.9 | 26.0 |
| United Kingdom | 6.2 | 8.1 | 5.6 | 3.9 | 0.3 | 24.1 |
| Luxembourg | 7.7 | 6.6 | 6.8 | 2.0 | 0.5 | 23.6 |
| Norway | 5.4 | 6.2 | 6.3 | 5.0 | 0.5 | 23.3 |
| Netherlands | 5.1 | 7.9 | 6.3 | 2.7 | 1.2 | 23.2 |
| OECD(34) | 7.8 | 6.6 | 4.8 | 2.4 | 0.5 | 22.1 |
| Czech Republic | 8.3 | 6.7 | 4.4 | 1.1 | 0.2 | 20.7 |
| Canada | 4.5 | 8.0 | 5.4 | 0.9 | 0.3 | 19.2 |
| Australia | 3.5 | 6.2 | 4.5 | 3.3 | 0.3 | 17.8 |
| Korea | 2.1 | 4.0 | 1.3 | 1.5 | 0.4 | 9.4 |
Countries are ranked by decreasing order of public social expenditure as a percentage of GDP.
Income support to the working-age population refers to spending on: incapacity benefits, family cash benefits, unemployment and other social policy areas categories.
20. Focusing reforms on inefficiencies and on harmonizing the various pension regimes would bring substantial saving and help restore the pension system financial sustainability. Pension spending contributes to lower poverty rates among people of retirement age. Based on OECD data13, this poverty rate is higher than in the Netherlands, Luxembourg, the Czech Republic or Canada which all devote a much smaller share of their GDP to pension spending (Table 3). The OECD (2012) considers that reforming the special regimes for civil servants, employees of state-owned enterprises, and employees of certain sectors (e.g., miners, notaries, railway workers, seamen, etc.) could be an important source of saving. It estimates that a convergence of these regimes and the private sector regimes could save 1.3 percent of GDP. Additional saving that would not reduce the social outcome of the pension system is the simplification of the very complex structure of the pension system: there are about 40 different compulsory schemes with different eligibility criteria and benefits (OECD, 2013). Finally, phasing out remaining incentives for early retirement including the longer unemployment benefit granted to older workers would provide additional savings (OECD, 2013; UNEDIC, 2012).
21. According to the OECD (2013), “public spending on healthcare might be reduced by some 1.3% of GDP without impairing quality”. It is beyond the scope of this paper to review all the efficiency gains that can be achieved in health spending but two important points can be made.14 First, no OECD country dedicates more public spending on health than France (Table 3). At 9 percent of GDP this is about 50 percent more than the OECD average. Second, because the sources of efficiencies in health spending are multifaceted, so are the types of reforms. The OECD (2012) argues that “strengthening the role of market mechanisms, changing reimbursement schemes, improving public management and control and imposing budget caps should form part of a cost containment strategy Due to budget caps (ONDAM), public health spending is growing more slowly in France than on average in the OECD. Going forward, France plans to limit the health spending growth from 3.5 percent in 2008-09 and 2.6 in 2010-12 to 2.5 percent over the period 2014-17. This is well below the ONDAM trend growth estimated at 4 percent.
22. As part of its plan to improve the efficiency of public spending (Modernisation de l’action publique), the government has launched a review of several expenditure categories including family-related spending and worker training. Poor targeting, conflicting objectives, and lack of cooperation at the various levels of governments have been recently documented by the Cour des comptes (2013, professional training and more generally labor policies) and the OECD (2013, family spending). As a result, savings could again be found in these areas while preserving the desired social impacts. From a narrow fiscal point of view, the saving that can be expected are smaller than those from a pension or a health care reform because family spending, though the third largest social spending, accounts for only 2.5 percent of GDP and professional training about 1.6 percent of GDP. However, a reform of the family policy is important because the system is financially unsustainable: family spending accounted for 10½ percent of the Social Security deficit in 2010 and 16½ percent two years later. Moreover, reforms in these areas go beyond the fiscal objective as they could have a positive impact on activation and labor market efficiency. Similarly, the evaluation and the rationalization of public investment launched by the Government should improve project selection and reduce the redundancy of some capital spending.
23. Social spending saving needs to be complemented by wage bill containment. Besides the fact that international experience suggests that wage bill containment is conducive to successful fiscal adjustment, it should play a role in France for two main reasons. First, reducing the expenditure ratio by 3 points of GDP as envisaged by the authorities cannot be achieved without a contribution from a large spending line such as the wage bill (close to ¼ of total spending). Second, if the growth of the wage bill is not reduced, it may undermine the whole consolidation effort or require even more effort to reduce social spending.
24. By European standards, the wage bill is large in France (Figure 8). It accounts for more than 13 percent of GDP i.e., 2.5 percent of GDP more than the Euro area average and 5.5 percent of GDP more than in Germany or Switzerland. Only the Scandinavian countries, Cyprus, and Malta have larger wage bills. This suggests that efficiency gains (notably by eliminating overlap and duplications at various levels of government) can also be achieved in the civil service without affecting the quality of public sector.
Employee compensation in total GG spending
(In percent of GDP, 2010)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: Eurostat and author’s calculations.Employee compensation in total GG spending
(In percent of GDP, 2010)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: Eurostat and author’s calculations.Employee compensation in total GG spending
(In percent of GDP, 2010)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: Eurostat and author’s calculations.25. Moreover, any saving effort would be undermined if the wage bill growth is not contained. The increase in the General Government’s wage bill declined from 3.9 percent per year during 1990-2007 to 1.8 percent per year during 2008-2012. This reflects an effort to contain the wage bill growth15 that should be should be maintained. Given the size of the wage bill in total spending, returning to the pre-crisis rate of growth would undermine the whole consolidation effort or require even more effort to reduce social spending.
26. Wage bill containment should take place at all levels of government. In recent years, the state’s nominal wage bill has been reduced thanks to wage moderation and measures taken to limit the size of the labor force (Figure 9). However, the impact of this effort on the general government wage bill has been partly offset by the rapid growth in the wage bill of state agencies (ODAC) and local government. Going forward, the government plans to continue its effort and limit the growth of its wage bill to 1 percent during 2012-15 (Ministère des Finances, 2012). As central government employees accounts for only 44 percent of General Government employment (INSEE, 2013)16, this effort needs to be complemented by employment containment at other levels of government17. In the past, this was not the case as social security’s wage bill and more noticeably, local government’s wage bill have grown particularly fast. This is, only in part explained by the decentralization process. The Ministry of Finance estimates that, between 2002 and 2009, local government created 262,458 jobs in addition to the job creation related to the decentralization process (Cour des comptes, 2009 and 2012). Another explanation is the duplication of activities and the overlapping competencies between levels of government.
Wage bill by level of government
(1986 = 100)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff calculation.Wage bill by level of government
(1986 = 100)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff calculation.Wage bill by level of government
(1986 = 100)
Citation: IMF Staff Country Reports 2013, 252; 10.5089/9781484389133.002.A003
Sources: INSEE and IMF Staff calculation.D. Conclusion
27. In order to achieve its medium-term objective of a balanced structural budget, France plans to implement a fiscal consolidation split broadly evenly between tax measures and expenditure saving. So far, the government has mostly relied on new taxes and tax increases. Going forward an expenditure saving in the amount of about 3 percent of GDP is required.
28. Based on international past experience with fiscal consolidation and specificities of the French economy, this paper argues that the effort should focus on reducing social protection transfers. Some social programs, such as family allowances and pensions, are financially unsustainable and would have to be reformed even if no fiscal consolidation was implemented. Moreover, French social spending is the highest in the OECD but also often suffers from inefficiencies and poor targeting. Therefore, if combined with reforms to increase efficiency, eliminate unemployment traps, and boost incentives to join (and stay longer in) the labor force, spending saving could be achieved without reducing the social and redistributive benefits of the French social system.
29. Achieving this high-quality fiscal adjustment requires that expenditure saving be implemented at all levels of government. Indeed, several social programs are jointly managed by the state, local governments, and the social security system. Similarly, public investment which is prone to redundancy is mostly undertaken by numerous local governments. Another reason is that, accounting for only 15 percent of GDP, central government spending cannot alone absorb a reduction in General Government spending of about 3 percent of GDP.
30. In addition, fiscal adjustment will be difficult to achieve without limiting the growth of the public sector wage bill. The state has capped its wage bill, but similar measures should be extended to other levels of government.
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Prepared by Jean-Jacques Hallaert.
In this paper, structural numbers are in percent of IMF estimated potential GDP.
Averaging 2.2 percent per year in 2008-09, real expenditure growth outpaced its trend growth of 1.5 percent (average real structural spending was 2.0 percent). Stabilizing the nominal and structural expenditure ratios required limiting real expenditure growth to 0.6 percent per year in 2010-13 (0.4 percent for structural spending).
The same recommendation was made more recently by the European Commission (2012) and the IMF (2012a).
IMF (2012b) shows how better designed tax and expenditure policies could significantly boost employment.
For more details on Swedish reforms, see among others EEAG (2012) and Perotti (2011).
For a review of the importance of output gaps in fiscal consolidation, see Molnar (2012).
17 percent of the French exports go to Germany, 8 percent to Italy, 7 percent to each Spain and Belgium. In 2011, France’s export-to-GDP ratio was below 28 percent but reached 42 percent in Finland and 50 percent in Sweden.
Although measuring another dimension of efficiency, the indicator “Government provision of services for improved business performance” provides the same picture. France ranks 70th out of the 139 countries for which this indicator is available well below Finland (8th), Switzerland (15th), Germany (22th), the Netherlands (25th), Sweden (27th), or Belgium (34th) but, again, above Spain (85th) and Italy (123th).
This remains true if one considers not only public spending but public and private spending on pensions (OECD, 2011).
France ranks only 18th out of 34 OECD countries for the share of population of 65 and over. At 16.7 percent, this share is 2 points above OECD average but about 3 ½ points below Italy and Germany.
Pension can be claimed at 62 years of age, although full pension rights may be accrued at a higher age depending on the years of contributions.
Provisional data from OECD Income distribution and poverty database (www.oecd.org/els/social/inequality).
See for detailed discussions, the OECD and Cour des comptes reports.
According to the Cour des comptes (2012), without any net job creation, the wage bill trend growth is about 1.6 percent every year.
This number includes ODAC employees.
The wage moderation decided by the government is automatically applied to all levels of government but the government has no direct on job creation at the local level.
