France — IMF Issues Article IV Statement

by Mike Godfrey, Tax-News.com, Washington

03 July 2009

The IMF has issued a Mission Concluding Statement following its Article IV consultation with France. The IMF looked to a renewed focus on medium-term fiscal sustainability and was concerned that credible medium-term fiscal consolidation needed to be interwoven with an ambitious structural reform agenda.

Fiscal stimulus and strong automatic stabilizers had been helpful to cushion the downturn in France, and the IMF considered that the fiscal response to support aggregate demand in 2009-10 was appropriate. However, in view of the strong need for medium-term fiscal consolidation, the IMF wanted to ensure that the current fiscal stimulus was indeed temporary - all measures should include sunset clauses or be automatically reversible. If the circumstances did deteriorate, the IMF may support further modest measures aimed at having the largest impact on the economy, for example investment spending, targeted transfers, promoting growth by enhancing productive capacity and alleviating financial constraints on SMEs. It used the example of the recently announced VAT reduction for restaurants to point out how these caused additional distortions to the tax system without generating broader economic benefits. The IMF would have preferred to see such things as the elimination of part of the Taxe professionnelle that is a disincentive to business investment.

According to the IMF, France’s main fiscal challenge remained to consolidate its public finances as current policies would lead to an unsustainable debt dynamics. With an already high public debt, the cost of the recession and the fiscal stimulus was set to 'significantly worsen the fiscal outlook over the medium term'. The IMF wanted to see a clear consolidation strategy anchored in the 2010 budget and focussing on expenditure cuts. Completion of the general review of the tax system (RGPO) would help streamline tax expenditures, in the view of the IMF. The IMF saw the recent adoption of a multiyear budgeting framework as a good opportunity to undertake fiscal consolidation in a credible manner. It advised that the multiyear budget projections ought to be based on realistic macroeconomic assumptions to avoid setting spending targets too high. In addition, it wanted to see the spending reductions clearly articulated at all levels of government so that the necessary expenditure restraint goals were acknowledged and adopted at all levels.

The IMF were encouraged by the consolidation progress already achieved by the central government, especially the objective of non-replacement of every second retiring civil servant which has been implemented. Zero growth of real expenditures by the central government should be maintained and the IMF cautioned not to erode these benefits by further allowing expenditure and social contribution exemptions (niches fiscales et sociales). Unfortunately increased devolution of responsibilities to local governments had so far failed to deliver more fiscal discipline - the civil service reduction implemented at the central level was broadly balanced by hiring at the local government level, noted the IMF's statement. The IMF believed that the spending drift by overlapping regional and local government structures needed to be reassessed. In this respect, a statistical bulge of local civil servants reaching retirement age after 2010 provided an opportunity for savings by extending the policy of non-replacement of every second retiring civil servant to local governments, said the IMF.

The IMF expected rising debt service obligations to aggravate the fiscal costs related to an aging population - the IMF wished to see measures taken to ensure the sustainability of the social security system. The reform of special pension regimes in 2007 and the gradual increase of the contribution period needed for entitlement to a full pension in line with the rising life expectancy, would reduce slightly the significant projected financing gaps in the period ahead. However, to improve the soundness of the current system, the IMF encouraged the government and the social partners to give serious consideration, as part of the “Rendez-vous 2010”, to raising the legal pension age, which at 60 years remained considerably below that in other euro area countries. With respect to health costs, the IMF wanted to see further expenditure controls, bearing in mind the rising long-term health expenditure implications of technical progress in health services.

While the IMF acknowledged ongoing reforms affecting labour market flexibility, it was concerned by the high fiscal cost of some of these measures. Following negotiations with the social partners, laws were adopted that have brought some easing of labour contract regulations, in particular with regard to probation periods and mutually agreed employment termination (ruptures conventionelles);the role of elections in determining the representativeness of trade unions had been strengthened. Also, regular working time and overtime could now be adjusted more flexibly within the framework of the 35-hours working week, stated the IMF. To gain political acceptability for these measures, overtime work benefited from significant tax and social contribution concessions, the IMF reported. The IMF believed that it was important to conduct a thorough cost-benefit analysis of these concessions.

Recommended