France: Selected Issues
Author: International Monetary Fund. European Dept.
Publication Date:
10 Jul 2015
eISBN:
9781513519579
ISBN:
9781513519579
Language:
English
Keywords:
ISCR; CR; center; local government; product market reform; bank; pay; public health spending; expenditure-saving measure; spending containment; expenditure database; wage bill; Health care spending; Pension spending; Aging; Europe
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France: Selected Issues

Abstract

France: Selected Issues

I. Expenditure Reforms1

After decades of rising public spending and successive tax increases, the medium-term fiscal consolidation path described in the 2015 Stability Program is now fully expenditure based. However, recent efforts of nominal spending containment have not delivered the intended savings in the context of low growth and inflation. A thorough review of the efficiency of public spending could help prepare more fundamental reforms of spending programs and processes to underpin a lasting reduction in expenditures, which reached a record high of 57½ percent of GDP in 2014.2

1. Social spending. Social spending has been a key driver behind France’s rapid growth in public expenditure over the past decades. From about 25 percent of GDP in 1990, public social spending reached 30 percent before the crisis and almost 32 percent in 2014, the highest ratio in the OECD. While high social spending is associated with a significant redistribution of income,3 it also suffers from inefficiencies and poor targeting. The OECD (2014) estimates that 27 percent of social benefits (in cash) go to the highest income quintile, and less than 17 percent to the lowest income quintile. If reforms to increase efficiency and targeting are combined with measures to boost employment, significant savings could be achieved in the longer term without reducing the social and redistributive benefits of the French social system. Reforming the social security system would be complex and require a coordinated strategy at all levels of government, as several social programs are jointly managed by the state, local governments, and the social security system.

A01ufig1

Public social expenditure

(in percent of GDP)

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A001

Source: OECD, Social Expenditure Database

2. Pensions. Pensions are by far the largest social expenditure in France, amounting to about 14 percent of GDP. No OECD country, except Italy and Greece, spends as much on pensions (Table 1).4 The reason is not demographic but rather a relatively generous pension regime.5 At 62,6 the legal retirement age is the lowest in the OECD although some retirees receive full pension only at 65 (rising to 67 in 2022). Past pension reforms implemented in 2003, 2010, and 2014 raised both the pensionable age and the contribution period necessary to reach full pension and eliminated most early retirement schemes. As a result, the effective retirement age rose from 58.5 years in 2002 to 60 years in 2012, still one of the lowest in the OECD, and is expected to continue increasing following the 2014 reform. Adding to the cost of the system is the high life expectancy after pensionable age: in 2010, it reached 21.7 years, 3.2 years longer than the OECD average (OECD, 2011). Additional savings could be achieved by:

  • Harmonizing the special regimes for civil servants, employees of state-owned enterprises, and employees of certain sectors (e.g., miners, notaries, railway workers, seamen, etc.) with the private sector regimes. The OECD (2012) estimates that the convergence of special regimes could save 1.3 percent of GDP.

  • Simplifying the complex structure of the pension system would provide additional savings without reducing the social outcome. There are about 40 different compulsory schemes with different eligibility criteria and benefits (OECD, 2013).

  • Phasing out remaining incentives for early retirement including the longer unemployment benefit granted to older workers would provide additional savings (OECD, 2013; Unédic, 2012).

  • Increasing the legal retirement age to at least 65 years and the age for full eligibility of benefits for the supplementary regimes.

Table 1.

Public Social Expenditure by Broad Social Policy Area

(In percentage of GDP, 2011)

article image
Source: OECD.

Income support to the working-age population refers to spending on the following SOCX categories: Incapacity benefits, Family cash benefits, Unemployment and other social policy areas categories.

3. Health. No OECD country dedicates more public spending on health than France and only the USA spends more on health when private spending is also considered. The OECD (2013) estimates that, because of multifaceted inefficiencies, public spending on healthcare could be reduced by some 1.3 percent of GDP without impairing quality.

  • To contain public health spending, an expenditure growth ceiling was created in 1996 (the objectif national des dépenses d’assurance maladie -ONDAM). The annual growth rate of the ceiling have been progressively lowered, and outturns have been in line with the ceiling since 2010. As a result, public health spending has been growing more slowly in France than on average in the OECD. For 2015–17, the government plans to limit the growth of ONDAM to less than 2 percent per year on average, down from 2.4 percent in 2014, and well below the trend growth of almost 4 percent.

  • To achieve this ambitious target, the government is implementing a reform of hospitals and is promoting ambulatory procedures, the use of generic medicine, and a rationalization of prescriptions. These measures are expected to reduce spending (compared to trend) by over €3 billion in 2015 alone and about 10 billion during 2015–17 (about 0.15 percent of GDP each year).

A01ufig2

Public and Private Social Expenditure - Health

(In percent of GDP in 2011)

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A001

Source: OECD Social Expenditure Database.

4. Unemployment benefits. Unemployment benefits are generous by European standards (see Chapter II), and account for 3 percent of general government spending. The state has no direct control on the unemployment benefit system as it is managed by social partners. Changes to the system aimed at improving its financial sustainability are expected to be negotiated by social partners in the coming months based on a report on the current system by Unédic in June 2015.

5. Other social benefits. The government has launched a review of several social programs, notably family-related spending and housing allowances (Aides personnelles au logement) with a view to increasing their efficiency and targeting. Before the reform of 2014–15, family allowance was the third largest social spending item, accounting for about 3 percent of GDP, while social spending related to housing accounted for 0.8 percent of GDP in 2011. A reform of family is important because the system is financially unsustainable: family spending accounted for 20¾ percent of the Social Security deficit in 2014 (up from 7½ percent in 2009). A reform of housing will bring little saving but could have a positive impact on activation and labor market efficiency.

6. Wage bill. At 13 percent of GDP, France’s public sector wage bill is the highest in Europe after the Nordic countries. The wage-scale freeze implemented since 2010 has allowed the state to keep its wage bill broadly constant. However, though the freeze applies to all levels of government, the wage bill of local governments and Social Security continue to grow faster than GDP. In 2014, local governments’ wage bill increased by 3.9 percent, its fastest rate since 2009, due to continued rapid job creation and, to a lesser extent, to the wage drift resulting from generous promotion practices and an ageing work force. Between 2002 and 2009, local government created more than a quarter million jobs in addition to the job creation related to the decentralization process (Cour des comptes 2009, 2012). Broad-based reviews of staffing at all levels of government could help inform a strategy for a reversal in the growth of public employment.

A01ufig3

Wage bill by level of government

(1986 = 100)

Citation: IMF Staff Country Reports 2015, 179; 10.5089/9781513519579.002.A001

Sources: INSEE and IMF Staff calculation.

7. Local government. Local governments are constrained by a “golden rule”, under which they can only borrow to finance investment. However, local spending has grown faster than nominal GDP by an average of one percent per year over the past two and a half decades. While some of this growth can be explained by decentralization of competencies, it also reflects loose budget constraints that allowed significant hiring, faster staff promotion than in other levels of government, investment, and social spending at the local level.

  • Because of the constitutional fiscal autonomy of local governments, the government has relied on indirect containment measures such as lowering transfers.7 These appear to have had an impact in 2014, although primarily in terms of delaying investment spending rather than reducing current spending on a more sustained basis or by improving targeting.

  • Complementing the reduction in transfers, the authorities are implementing institutional reforms aiming at rationalizing overlapping structures of local government. The planned elimination of the “general competency clause”, which allows local governments to spend in all areas without restrictions, could lead to a more immediate rationalization of spending and substantial savings.

  • A new indicative target for the evolution of local public expenditure (ODEDEL, Objectif d’évolution de la dépense publique locale) became effective this year. While it aims at replicating the approach of the ONDAM for health spending, the ODEDEL remains indicative, and an important question will be whether local government will adhere to the target. The tool may need to be developed further to incentivize reductions in areas of inefficient spending, especially staffing, and preserving important expenditures, such as infrastructure investment.

  • In the face of declining transfers, local governments, notably municipalities, may increase taxes to finance higher expenditures. The state does not have direct control over local taxation, but can limit increases in tax rates.

8. Spending reviews and rules. The multiyear budget law approved in late 2014 has introduced the principle of targeted expenditure reviews. However, compared to other systems, for example the U.K., there are relatively limited tools for assessing the quality and efficiency of public spending. Moreover, while a range of spending targets and rules exist for various levels of government, there is no clear multi-year spending anchor for the general government, and there is no transparent system of burden sharing among levels of government.

Potential Expenditure Reforms

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References

  • Cour des comptes, 2009, Les effectifs de l’Etat 1980–2008: Un Etat des lieux (Synthèse du rapport public thématique), Paris: Cour des comptes, 23 p.

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  • Cour des comptes, 2012, La situation et les perspectives des finances publiques, Paris: Cour des comptes, 271 p.

  • European Commission, 2015, The 2015 Ageing Report - Economic and budgetary projections for the 28 EU Member States (2013-2060), European Economy, 3/2015, 397 p.

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  • Hallaert, J.J., 2013, Which Expenditure Saving to Sustain Medium-Term Fiscal Consolidation?” Washington DC: IMF, IMF Country Report No. 13/252, pp. 29–47.

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  • INSEE, France, Portrait social, Paris: INSEE, various years.

  • OECD, 2011, Pensions at a Glance 2011, Paris: OECD, 325 p.

  • OECD, 2012, What are the best policy instruments for fiscal consolidation? Paris: OECD, Economics Department Policy Note No. 12, 11 p.

  • OECD, 2013, OECD Economic Surveys: France, Paris: OECD, 152 p.

  • OECD, 2014, Social spending is falling in some countries, but in many others it remains at historically high levels. Paris: OECD, 8 p.

  • Unédic, 2012, L’assurance chômage en Europe, Paris: Unédic, 10 p.

1

Prepared by Jean-Jacques Hallaert (EUR). This note builds on Hallaert (2013).

2

The increase in the expenditure-to-GDP ratio in 2014 was fully due to rising tax credits (Crédit d’impôt pour la Competitivité et l’Emploi and, to a lesser extent, the Crédit d’Impôt-Recherche).

3

Taxes and transfers reduce income inequality (measured by the Gini index) by about 40 percent. Over 60 percent of this reduction is achieved by transfers (INSEE, various years).

4

This is true whether one considers only public spending only or public and private spending (OECD, 2011).

5

At 17.6 percent, France’s share of population of 65 and over is 2 points above OECD average but about 3½ points below Italy and Germany. The European Commission projects that the old-age dependency ratio will increase until 2040 and stabilize over 2040–60. In part due to the recent reforms, the cost of pension as a share of GDP is expected to remain stable until 2025 and decline steadily over 2025–60 (EC, 2015).

6

Following the 2014 reform, the legal age will gradually increase from 60 to 62 in 2017.

7

Transfers from the central government to local governments are being reduced by 12.2 billion (0.5 percent of GDP) during 2014–17.

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Cover IMF Staff Country Reports
France: Selected Issues
Author: International Monetary Fund. European Dept.
Volume/Issue:
Volume 2015: Issue 179
Publisher:
International Monetary Fund
ISBN:
9781513519579
ISSN:
1934-7685
Pages:
31
DOI:
https://doi.org/10.5089/9781513519579.002

Public social expenditure

(in percent of GDP)

Public and Private Social Expenditure - Health

(In percent of GDP in 2011)

Wage bill by level of government

(1986 = 100)