Council Opinion

of 12 February 2002

on the updated stability programme of France, 2003-2005

(2002/C 51/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies(1), and in particular Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

On 12 February 2002 the Council examined the updated stability programme of France which covers the period 2002-2005.

The 2001 update of the stability programme projects real GDP growth at 2,3 % in 2001 and 2,5 % in 2002. From 2003 to 2005, the projections are based on two macroeconomic scenarios: a "cautious" scenario in which GDP growth averages 2,5 %, considered to be the current level of potential growth, and a "favourable" scenario where real GDP growth accelerates to 3 %. The general government deficit is estimated to remain unchanged in 2001 and in 2002 at 1,4 % of GDP, the level reached in 2000. From 2003 to 2005, according to the cautious scenario, the government deficit should decline to 1,3 % of GDP in 2003 and 0,5 % of GDP in 2004; the government balance is expected to be attained in 2005. The budgetary adjustment would be faster should the favourable scenario materialise, a government balance being expected in 2004, turning into a 0,3 % of GDP surplus in 2005. The general government debt estimated at 57,1 % of GDP in 2001 is projected to be lowered in 2005 to 52,9 % of GDP in the cautious scenario and to 51,8 % of GDP in the favourable scenario.

The Council considers that the macroeconomic projections encompass downside risks in the short term: in more recent forecasts, real GDP growth is expected not to exceed 2 % in 2001 and 1,5 % in 2002; consequently, the Council notes that the government deficit in 2002, the starting year of the projections is likely to be less favourable than initially expected. Regarding following years, the Council considers the "cautious" scenario, in which real GDP growth averages 2,5 % from 2003 to 2005, as the more plausible one.

The Council notes that, in the cautious scenario, the general government deficit is projected to be reduced significantly only from 2004; the reduction projected for 2003 is marginal and the deficit for that year will stay rather at the same level as in 2000. The deficit remains roughly unchanged in 2000-2003 also in cyclically adjusted terms. In spite of a higher than expected deficit in the first few years, a balanced position is still reached in 2005. Nevertheless, this is one year later than recommended in the opinion of last year. The Council therefore urges the French authorities to use every opportunity to reach a balanced position in 2004.

The budgetary objectives included in the 2001 update of the stability programme respect the requirement of close to balance or in surplus of the stability and growth pact in 2004 and 2005, although only in the latter year a balance in cyclically adjusted terms is expected. However, the underlying budgetary position provides a safety margin to avoid breaching the 3 % of GDP threshold as from 2001 despite the downside risks in the macroeconomic projections.

The French budgetary strategy is based on predetermined multiannual spending norms, in real terms; the Council commends such a strategy, considering that a clear binding norm for expenditure secures a transparent budgetary adjustment. However, the Council notes that, with macroeconomic developments in line with official expectations, respect of the spending norm as it was set in the 1998 stability programme for the period 2000-2002 would have broadly ensured the projected reduction in the general government deficit for the same period, despite the implementation of the tax reform. In particular, the Council notes that, in 2002, expenditures are planned to increase slightly faster than recommended in the 2001 broad economic policy guidelines. The Council welcomes, however, that the multiannual spending norm for the period 2003-2005 has now been reduced to 4 %. The Council encourages the French authorities to fully respect this norm.

The Council welcomes the intention to make any reduction in the tax burden after 2003 conditional on real GDP growth and on the attainment of a close to balance or in surplus budgetary position.

The target of moving towards a budgetary balanced position is a necessary step to placing public finances on a more sustainable footing in view of the budgetary burden arising from ageing population in France. The Council notes that the strategy outlined in the 2001 updated programme to prepare for this challenge needs more ambition. The Council considers it necessary that France makes as soon as possible further progress in the reform of the pension system.

(1) OJ L 209, 2.8.1997.