Council opinion

of 21 January 2003

on the updated Stability Programme of France, 2004-2006

(2003/C 26/04)

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 21 January 2003 the Council examined the updated stability programme of France which covers the period 2003 to 2006. This update is the first programme prepared by the new Government, which took office in June 2002; it provides a budgetary strategy designed to support a strong and lasting improvement in economic and employment growth. The programme complies with the requirements of the revised Code of Conduct on the content and format of stability and convergence programmes. The Council considers that the programme complies partly with the recommendations of the 2002 Broad Economic Policy Guidelines.

The Council, having identified a significant divergence in 2002 budgetary developments from the projections of the 2001 update of the stability programme, and considering that this divergence is not corrected in the plans for 2003, adopted on 21 January 2003 a recommendation with a view to giving early warning to France in order to prevent the occurrence of an excessive deficit. According to this recommendation: (i) The French Government should take all the appropriate measures in order to ensure that the general Government deficit does not breach the 3 % of GDP threshold in 2003; (ii) Adopting measures apt to improve the cyclically-adjusted budgetary position by at least 0,5 percentage point of GDP would not only reduce the risk for the general government deficit to breach the 3 % of GDP threshold in 2003, but also contribute to resuming a budgetary consolidation path towards a close to balance position as from 2003; (iii) Continuous adjustment in the underlying budgetary position by at least 0,5 % of GDP per year should be pursued also in subsequent years in order to achieve the medium-term budgetary position of close to balance or in surplus by 2006.

General government finances deteriorated markedly in 2002. The updated stability programme estimates the 2002 general government deficit at 2,8 % of GDP, a level higher than that recommended in the early warning and well above the 1,4 % of GDP planned in the previous update. The Council notes that a large part of the slippage in 2002 is due to a deterioration in the underlying balance, which mainly reflects an overrun in expenditures. The budget for 2003 projects the general government deficit at 2,6 % of GDP; this projection is consistent with a decrease in the cyclically-adjusted by 0,2 % of GDP in 2003 to 2,6 % of GDP(2).

The macroeconomic assumption underlying the budget of an increase in real GDP by 2,5 % in 2003 is to be considered as optimistic. Therefore, there is a danger for the government deficit to breach the reference value in 2003. A further deterioration in the 2002 position, which cannot be excluded, or an eventual slippage in the 2003 budget could also bring the general government deficit above 3 % of GDP in 2003. In its Autumn forecast, the Commission projected an increase in the government deficit by 0,2 percentage point between 2002 and 2003 under the assumption of real GDP growth at 2,0 %. Finally, a risk exists that the government debt breaches the 60 % of GDP reference value in 2003.

For the period 2004 to 2006, the macroeconomic projections of the 2002 update are based on two scenarios: a "cautious" scenario, with real GDP growth at 2,5 % a year over the period, and a "favourable" scenario where real GDP growth reaches 3 % per year. The projections of the "favourable" scenario encompass downside risks, and the "cautious" scenario should be taken as the reference one for assessing budgetary developments. In the "cautious" scenario, the government deficit is projected to decline by 0,5 percentage point of GDP per year as from 2004 to reach 1,0 % of GDP in 2006, which implies that the medium-term objective of close to balance or in surplus would not be reached in the programme period. In the "favourable" scenario, the government deficit would reach a close to balance position in 2006.

The Council notes that the budgetary consolidation mainly takes place from 2004 onwards. The effort planned for 2003 reaches 0,2 percentage point of GDP, and between 2004 and 2006, the underlying budgetary position improves by 0,5 percentage point a year. The Council urges the French authorities to seek an improvement in the underlying budgetary position of at least 0,5 % each year in order to reduce the risk for the general government deficit to breach the 3 % of GDP threshold and to reach a close to balance position by 2006.

The slow budgetary adjustment is partly due to the implementation of tax cuts from 2003 worth 0,2/0,3 percentage point of GDP per year, in a context where expenditures are projected to increase at the same rate as in the 2001 update. Although considering that a reduction in the tax burden is to be welcomed in so far as it contributes to strengthen potential output growth, the Council regrets that the current update does not confirm that any reduction in the tax burden after 2003 is conditional on the attainment of a close to balance budgetary position.

The budgetary strategy of the 2002 updated stability programme remains based on defining norms for general government expenditure increases in real terms. This strategy has already been commended by the Council in its opinions on the previous updated programmes. Over the period 2004 to 2006, real expenditures are planned to increase by 3,9 % in real terms. The Council considers, in particular in view of recent economic and budgetary developments, that ambitious reforms should be rapidly implemented in order to ensure that this objective is achieved. The Council welcomes the structural measures designed to curb expenditures in the health sector taken recently and the actions aiming at improving the control of budgetary execution in the State sector. It also welcomes the commitment to implement corrective infra-annual measures in the social security sector in the event of an evidence of overspending. The Council considers that these reforms should lead to a better adherence to the ex ante defined pluri-annual expenditure norms.

On the basis of current policies, the risk of unsustainable public finances in light of ageing populations cannot be excluded. If debt reduction is to make a noticeable contribution towards meeting the budgetary cost of ageing populations, then reaching a balanced budget position by 2006 is essential; this should be part of an ambitious three-pronged strategy to meet the long-term budgetary consequences of ageing and may have to include the running of surpluses. Running sound public finances over the long run will allow to achieve a significant reduction in the debt ratio prior to the budgetary impact of ageing populations taking hold. The Council welcomes the intentions of the French authorities to reform pension and health-care systems in light of ageing populations and urges them to proceed rapidly with these reforms given the limited window of opportunity.

(1) OJ L 209, 2.8.1997.

(2) These calculations are based on the production function method approved by the Council.