29.5.2010   

EN

Official Journal of the European Union

C 140/6

(1)

On 26 April 2010 the Council examined the updated stability programme of France, which covers the period 2009 to 2013.

(2)

Economic activity in France lost its dynamism in the course of 2008 and declined sharply in the fourth quarter and in the first quarter of 2009. From the second quarter of 2009, it picked up again, supported by stimulus measures in France and in neighbouring countries. One prominent challenge for economic policy is the situation of public finances. Specifically, since 2002 the deficit in France has been either above or close to the 3 % of GDP threshold, mainly a reflection of insufficient consolidation efforts. In this context, France was under an excessive deficit procedure between 2002 and 2007, and received a policy advice from the Commission in May 2008. Following the notification of a deficit above the 3 % of GDP threshold in 2008, a new excessive deficit procedure was launched in February 2009, which foresees the correction of the excessive deficit by 2013. Other challenges include addressing the supply-side weaknesses which lead to insufficient external competitiveness, as well as increasing labour utilisation.

(3)

Although much of the observed decline in actual GDP in the context of the crisis is cyclical, the level of potential output has also been negatively affected. In addition, the crisis may also affect potential growth in the medium-term through lower investment, constraints in credit availability and increasing structural unemployment. Moreover, the impact of the economic crisis compounds the negative effects of demographic ageing on potential output and the sustainability of public finances. Against this background it will be essential to accelerate the pace of structural reforms with the aim of supporting potential growth. In particular, for France it is important to undertake reforms in the areas of the labour market and the overall competition framework.

(4)

The macroeconomic scenario underlying the programme envisages that after a contraction by 2,2 % in 2009 real GDP will grow again by 1,4 % in 2010 before recovering to an average rate of 2,5 % over the rest of the programme period. Assessed against currently available information (2), this scenario appears to be based on slightly favourable growth assumptions for 2010 broadly in line with the Commission services’ forecast and the composition of growth in the programme’s projections is richer in taxes than in the Commission services’ forecast. From 2011 growth assumptions are markedly favourable and 0,75 pp. above potential on average from 2011 to 2013 (as recalculated by the Commission services’ based on the information in the programme following the commonly agreed methodology). This translates into a rapidly closing output gap. The growth rates rely mainly on domestic demand, and notably households’ consumption, throughout the programme period. The programme’s projections for inflation appear in line with the Commission services’ forecasts, as well as those for employment growth, which stays negative in 2010 before recovering, reflecting the traditional lag with activity.

(5)

The programme estimates the general government deficit in 2009 at 7,9 % of GDP. The significant deterioration from a deficit of 3,4 % of GDP in 2008 reflects to a large extent the impact of the crisis on government finances (notably corporate tax receipts and VAT), but was also brought about by stimulus measures amounting to 1,1 % of GDP which the government adopted in line with the European Economic Recovery Plan (EERP). According to the programme, fiscal policy is planned to be neutral in 2010 and is turning restrictive in the outer years with a view to correcting the excessive deficit by 2013 under the assumed growth scenario. This consolidation is in line with the exit strategy advocated by the Council.

(6)

The February 2010 stability programme expects the general government deficit in 2010 to further deteriorate by 0,3 % of GDP and reach 8,2 % of GDP in 2010. France has implemented the deficit-reducing measures in 2010 as planned in the government proposal for the budget law for 2010 while largely avoiding a further deterioration of public finances, with the exception of the decision on a public loan ‘to invest in the future’ that will have a negative budgetary impact of around 0,1 % of GDP in 2010 (and thereafter), which appears to be broadly in line with the latest recommendations under Article 126(7) TFEU addressed to France. The deficit projection for 2010 is 0,3 % of GDP better than the one in the draft budget for 2010, on account of a better deficit outcome anticipated for 2009 (0,2 % of GDP) and a revision of growth projections (0,3 % of GDP), partly offset by the suspension of the environmental tax by the French Constitutional Court as well as the introduction of measures stemming from the previously mentioned public loan, which would together deteriorate the deficit by around 0,2 % of GDP. The latter elements changed the balance of discretionary measures from around + 0,25 % of GDP at the time of the Council recommendation to broadly neutral in the programme. Stimulus measures in the context of the EERP of 1,1 % of GDP are partially phased out and reduced to 0,4 % of GDP in 2010, and there are some further consolidation measures of 0,1 % of GDP (notably the increase in taxes included in the social security budget), bringing total consolidation measures to 0,8 % of GDP. However, these measures are offset by new deficit-increasing measures with mostly short term costs included in the original budget for 2010 amounting to 0,7 % of GDP, notably the reform of the local business tax (around 0,6 % of GDP) and the decrease in VAT for the catering sector (0,1 % of GDP), as well as by the previously mentioned measures related to the public loan (around 0,1 % of GDP). In 2010, the structural deficit, i.e. the cyclically-adjusted deficit net of one-off and other temporary measures calculated by the Commission’s services on the basis of the programme figures according to the commonly agreed methodology, would deteriorate by 0,25 pp. and reach 6,75 % of GDP. When taking into account the transitory impact of anticipated reimbursements for firms of 0,4 % of GDP in the context of the implementation of the reform of the local business tax, a one-off measure but not considered as such in the programme, the structural deficit would slightly improve by 0,1 pp. in 2010 to 6,5 % of GDP.

(7)

The main goal of the programme's budgetary strategy is to bring the general government balance to the 3 % of GDP reference value by 2013, the deadline set in the Council recommendation of 2 December 2009. The programme projects the nominal budget deficit to decrease to 6 % of GDP in 2011 and to further decline to 4,6 % in 2012 before it eventually reaches 3 % in 2013. The primary balance is expected to follow a somewhat similar path and would reach – 0,1 % of GDP at the end of the programme period, from – 5,5 % of GDP in 2010. The structural deficit calculated according to the commonly agreed methodology would continue to improve after 2010, to reach around 5 % of GDP in 2011, 4 % in 2012 and 2,75 % in 2013. The average annual fiscal effort would come out at 0,9 % of GDP over the period 2010-2013, which is somewhat below the average effort of above 1 % of GDP per year recommended by the Council. The consolidation strategy outlined in the programme would rely on measures aimed at curbing expenditure growth at all government levels, on top of the complete phasing out in 2011 of the measures in line with the EERP. The French authorities intend to further reduce the budgetary impact of existing tax exemptions by around 0,1 % of GDP each year starting in 2011. The measures supporting the consolidation strategy are not yet specified but should be unveiled in the forthcoming months. The programme considers that the medium-term objective (MTO) is a balanced budget in structural terms. Given the most recent projections and debt level, the MTO more than adequately reflects the objectives of the Pact. The updated stability programme does not envisage achieving the medium-term budgetary objective within the programme period.

(8)

While in 2010 the deficit target appears to be rather plausible and even leaves some room for a better performance in case the environmental tax is eventually implemented in an amended form, the budgetary projections could turn out worse than projected in the programme from 2011 on. In particular, the macroeconomic scenario over 2011-2013 is markedly favourable. Specifically, the deficit projections are highly sensitive to growth: according to the sensitivity analysis in the programme, should GDP growth be lower by 0,25 pp. over this period, the general government deficit would only fall to 4 % of GDP in 2013.

A cumulative loss of 0,75 % of GDP would therefore translate into 2013 in a deficit increase of 1 % of GDP. Additionally, the deficit targets could be negatively affected by possible expenditure slippages, as the correction of public expenditure trends at all sub-government levels compared to their past trends is not backed by sufficiently specified measures. The rather optimistic projected evolution of revenue is based on the hypothesis of a catch-up phenomenon after the negative overshooting during the crisis, as the tax-to-GDP elasticity is foreseen to reach 1,2 on average from 2011 to 2013. The reduction in tax exemptions by around 0,1 % of GDP each year as from 2011 is also not yet specified. Overall, the track record indicates that expenditure overruns cannot be ruled out. The assessment based on the information presented in the programme suggests that there are substantial risks that the deficit outcomes for the 2011-2013 period may be worse than targeted in the programme.

(9)

The government gross debt ratio was above the Treaty reference value in 2009 and is according to the programme on an increasing trend until 2012. Government gross debt is estimated at 77,4 % of GDP in 2009, up from 67,4 % in 2008. Apart from the increase in the deficit and the decline in GDP growth, a significant stock-flow adjustment, reflecting notably financial operations for the banking and the automobile sectors, contributed to the rise in the debt ratio. A further increase by a 9,2 pps. is projected over the programme period, reaching the level of about 87 % of GDP, mainly driven by continued high government deficits. In view of the substantial risks to the budgetary targets, the evolution of the debt ratio is likely to be less favourable than projected in the programme, especially after 2011.

(10)

Medium-term debt projections that assume GDP growth rates to gradually recover to the values projected before the crisis, tax ratios to return to pre-crisis levels and include the projected increase in age-related expenditure show that the budgetary strategy envisaged in the programme, taken at face value and with no further policy change, would not be sufficient to stabilise the debt-to-GDP ratio by 2020.

(11)

The long-term budgetary impact of ageing is clearly lower than the EU average, with pension expenditure showing a more limited increase, as a result of the pension reforms already enacted. The budgetary position in 2009, as estimated in the programme, compounds the budgetary impact of population ageing on the sustainability gap. Ensuring primary surpluses over the medium-term would contribute to reducing the risks to the sustainability of public finances which were assessed in the Commission 2009 Sustainability Report (3) as medium.

(12)

Reforms have recently been introduced to further improve the overall budgetary framework. On 9 February 2009, the first multi-year public finance planning act was adopted by Parliament, setting out expenditure targets at all general government sub-sectors. It also notably lays down the principle of budgetary neutrality for the creation of new tax exemptions, whose aggregate cost must be fully offset. This principle is compulsory and has almost been met in 2009 assessed on a multi-year basis. The annual budgetary framework in France notably comprises expenditure norms set for general government sub-levels. A first rule, the so-called ‘zero volume increase expenditure rule’, is set at the central government level. Although in the past changes in the perimeter of the rule may have helped to respect it, recently the perimeter was broadened with the aim of achieving a better control of central government expenditure and it has been adhered to.

The national health insurance spending objective (Objectif National des Dépenses d’Assurance Maladie) introduced in 1997 has helped control healthcare spending even if the expenditure targets have been often missed. Finally, local authorities’ expenditures are limited by a ‘golden rule’ with a legal basis, which prevents authorities from raising debt to finance operational expenditures and by a rule stipulating that the increase of funds transferred by the central government cannot exceed the rate of inflation. However, the objectives set in the stability programmes have rarely been reached. The government intends to further reform the fiscal framework. A conference on public finances was organised on 28 January 2010 with the aim of addressing the deterioration of French public finances and on how to implement budgetary consolidation. Several working groups were set up to propose new reforms to be unveiled in April and notably aiming at further curbing the evolution of healthcare spending, or at better controlling local expenditures. A working group on balanced budget rules was also set up. The programme indicates as well that new measures aimed at reducing central government spending will be presented in April. The consolidation strategy presented in the programme also relies on an improvement of the budgetary framework that would follow the proposals made by these working groups.

(13)

At 52,7 % in 2008, France's expenditure-to-GDP ratio is the highest in the euro area. The rise in public expenditure over the past decades has contributed to high deficits and debt levels, which have affected the long-term sustainability of French public finances. The French authorities launched in 2007 the General Review of Public Policies (Revue Générale des Politiques Publiques, or RGPP) with the aim of identifying ways of making government expenditure more efficient. More than 300 measures have been identified so far (with the aim to achieve savings of around 0,3 % of GDP which has been rather modest compared to the global amount of public expenditure, exceeding 50 % of GDP). About 0,75 have been implemented and for example made possible the non-replacement of one out of two retiring civil servants in the central government sub-sector. The government announced in the budget law for 2010 that the RGPP would be extended to other central bodies and further reforms are expected to be announced in autumn. Finally, regarding the pension system, as previously mentioned, the programme refers to a reform expected in 2010. No measures have been announced yet.

(14)

Overall, in 2010 the budgetary strategy set out in the programme is broadly consistent with the Council recommendations under Article 126(7). However, from 2011 on, taking into account the risks, the budgetary strategy would not seem to be consistent with the Council Recommendation under Article 126(7). According to the programme, the average annual fiscal effort, based on the evolution of the (recalculated) structural balance would reach 0,9 % of GDP. This is somewhat below what was requested in the Council’s recommendations under Article 126(7) (‘above 1 % of GDP’) and is moreover subject to the risks mentioned above. The programme nevertheless anticipates the nominal budget deficit to eventually reach 3 % of GDP, which is notably due to a markedly favourable macroeconomic scenario in the outer years of the programme, as well as rather optimistic assumptions regarding elasticity of fiscal revenue to GDP. Overall, taking into account the risks on current policies the deficit outcomes for the 2011-2013 period may turn out to be worse than targeted in the programme and may have to be strengthened considerably to achieve a correction of the excessive deficit by 2013, as recommended by the Council. Using revenue from a new version of the suspended environmental tax as mentioned in the programme would help achieve somewhat better budgetary targets already from 2010. Finally, the budgetary strategy may also not be sufficient to bring debt back on a downward path.

(15)

As regards the data requirements specified in the code of conduct for stability and convergence programmes, the programme provides all required and most of the optional data (4). In its recommendation under Article 104/126(7) of 2 December 2009 with a view to bringing the excessive deficit situation to an end, the Council also invited France to report on progress made in the implementation on the Council's recommendations in a separate chapter in the updates of the stability programme. France complied with this recommendation.

(i)

use, throughout the programme period, windfalls related to an improvement of the macro-economic and fiscal outlook, as well as the implementation of all envisaged tax measures to accelerate the deficit reduction and the decline of the gross debt ratio back towards the 60 % of GDP reference value;

(ii)

stand ready to adopt further consolidation measures, in case risks related to the fact that the macroeconomic scenario of the programme is more favourable than the scenario underpinning the Article 126(7) Recommendation materialise, and further specify the measures necessary to ensure an average annual fiscal effort of above 1 % of GDP over the period 2010-2013 and to achieve a correction of the excessive deficit by 2013;

(iii)

ensure that the budgetary framework is reinforced, in particular on the expenditure side, and effectively supports the achievement of the outlined medium-term fiscal plans at all sub-government levels, as planned by the French government.